Why - Life Insurance

While 84% of U.S. adults believe that most people need life insurance, only 59% of people actually have a policy, and the proportion of people covered is correlated with age, according to LIMRA’s 2017 Insurance Barometer Study.

Though a life insurance policy may be purchased for a wide variety of reasons, such as reducing business risk or using the cash value as an investment, coverage is more often considered a “need” if: 

• You’re married or have financial dependents (such as children or other family members) that rely on your income or services.
• You have outstanding loans that would affect someone else.
• You’re required to have life insurance as a form of loan collateral (a common case with small business loans).

It can be difficult to determine whether or not life insurance is applicable, and what type of policy you’d need, even when you’re in one of those situations. Below, we’ve broken down three of the most common reasons a young adult would need coverage and what to look for in a policy.

1. Family and dependents

While purchasing life insurance is most commonly associated with the birth of a child, it can also serve an important role in providing financial assistance to the other people that depend on you. This can be a spouse, parent, or even a sibling. The question to ask is, if you were to disappear tomorrow, who would be affected and is there a financial value associated with that?

For example, if you’re married and in a dual-income relationship, your spouse could use the proceeds from a life insurance policy in order to cover any ongoing expenses in excess of his or her earnings. Or, if you work from home to provide consistent care to a special-needs sibling, a life insurance policy could help to ensure that your family would have funds to hire a caretaker in your absence. Of course, if you do have a child, life insurance is commonly used to make sure he or she has the resources to attend college, as the average annual price ranges from $20,090 for a public in-state college to $45,370 for a private nonprofit college.

2. Debts

Nearly everyone has some form of debt, whether it’s a student loan, credit card, mortgage, or car loan. While the saying “debts die with you” has some truth to it, there’s actually a fair number of scenarios in which this is not the case, and the rules typically change according to the type of debt you have. This means that if you passed away with outstanding loans, these could be transferred to the people you hold dearest. Life insurance can provide the resources to your family to pay off outstanding obligations.

For young adults, student debt has grown to be a significant burden, and your particular lender could determine whether the loan dies with you. A federal student loan is forgiven if you pass away, and this is the policy of some private lenders as well. But the majority of private lenders would make a claim against your estate for the balance of the loan, then come after any cosigners of the loan to pay the remaining amount due. Similarly, if you die with credit card debt, the issuer can pursue payment from any joint cardholders.

Young adults in particular are more likely to have cosigners for their debts, given their shorter credit histories, so their passing would not only be traumatic for their families, but also more likely to affect them financially.

3. Loan requirement

In some cases, particularly if you’re trying to take out a small business loan, a lender may require you to have life insurance in place as a form of collateral.  For example, a business might take out a policy on its cofounders, executives, top sales people, or anyone in the company with particularly unique skills and high value. By doing so, it assures lenders and investors that the company would be able to continue operations, or at least not go immediately bankrupt, if a person who plays a key role in the company were to pass away.

What should you look for in a policy?

While you shouldn’t purchase life insurance if you have no need for it, the cost of coverage is significantly lower if you’re young and healthy. If you later decide to increase the face value of a life insurance policy that’s already in place, premiums for additional coverage will be priced based upon your greater age. Therefore, you should look for a policy that has at least as much coverage as you need currently, if not more (to account for greater needs in the coming years).

Also consider the length of coverage, taking your financial obligations into consideration. Term coverage is best if you know approximately how long you’ll need life insurance (for example, the duration of a 30-year mortgage). Most people don’t need cash value life insurance, which can cost 10 times as much as term given its investment component, but you may also want to consider guaranteed universal life insurance if you foresee an ongoing need for coverage. Guaranteed universal life insurance offers lifelong coverage with little-to-no cash value component and, while you’re young, you can lock in reasonable rates.

Finally, get a fully underwritten life insurance policy if at all possible. Many insurers offer “no medical exam” life insurance or the ability to buy coverage while providing almost no personal information, but these options will significantly increase premiums while limiting the policy size. When you’re young, take advantage of the situation and get the best rates possible.