Life insurance is a financial product that provides a lump sum cash payment, known as the death benefit when the insured passes away. Life insurance aims to mute any financial hardship that may arise from the lack of income the deceased will not earn any longer, plus any outstanding debts or obligations of the deceased’s that must be repaid.
If you want to purchase a permanent insurance policy with a cash value, you need to own it long enough for the cash benefit to grow, and a term-life policy is only set for a certain number of years. The right time to buy life insurance varies from person to person, depending on family and financial circumstances.
Generally, you need life insurance if other people depend on your income or if you have debt that will carry on after your death. However, the older you get the more expensive life insurance costs. A healthy non-smoking 20-year-old will pay less than someone with the same health profile but who is 20 years older. If you wait too long to purchase life insurance, not only is it more expensive, it can be harder to get the policy approved by an insurance underwriter.
Key Takeaways
- If others depend on you financially—or you have debt—it’s crucial to have life insurance.
- This is because life insurance ensures that your financial obligations are taken care of and your family supported even if you have an untimely death.
- The sooner you purchase life insurance, the better, as it becomes more expensive with each passing year.
- Term life is cheaper but only lasts for the number of years of the policy term (e.g., 20) and does not feature a cash component.
- Permanent life insurance has a cash value component. Holding the policy for longer lets that cash value grow over time.
What Is Life Insurance?
Why Younger Is Better
When it comes to timing, the younger you are when you buy life insurance, the better. This is because, at a younger age, you’ll qualify for lower premiums. And as you get older, you could develop health problems that make insurance more expensive or even disqualify you from purchasing a plan.
However, younger people faced with mortgages, car payments, and student loan debt tend to put off buying life insurance. While paying off current debt is critical, missing out on buying life insurance at a young age has a significant economic impact, much like delaying saving for retirement. The sooner it is purchased, the better.
When To Purchase Term Insurance
Term life insurance covers you for the term of the policy. While younger is generally better, when that term should start may also be based on when you anticipate other people depending on your income. You’ll want the term of the policy to last as long as your dependents will need your income. For parents, this is often until their children are grown.
People in couples who own property together may want to be covered until their mortgage is paid off. If both people in a couple are earning income that is crucial to the family, then each should be covered. Parents who don’t earn income may also want to consider coverage, as their unpaid labor (childcare, etc.) might need to be replaced by paid services (like daycare) in the event of their death.
Life insurance may be prudent even before you have dependents if you have unsecured debt, such as credit card debt or some private student loans. For instance, credit card companies require that all outstanding balances be paid upon the death of the holder.
When to Buy Permanent Life Insurance
With a permanent life insurance plan, the cash value grows tax-deferred. Premium contributions to whole life policies purchased at an early age can accumulate considerable value over the long-term time, as the cost of insurance is fixed for the entire term of the policy.
Cash value can even be used as a down payment for a first home purchase. If held long enough, what you accumulate may be able to supplement retirement income. However, the money needs time to grow, which is why an early start is best.
A whole life insurance policy can be prepaid via a lump sum for a minor (even an infant!). When the minor turns 18, the policy can be transferred to the insured, at which point the policy can be funded further, or cashed in if it holds any equity.
Cost of Waiting
Forgoing life insurance purchases at a young age can be costly. The average cost of a 20-year level term policy with a $250,000 face amount is about $214 per year for a healthy 30-year-old male. In contrast, the annual premium for a 40-year-old male is about $486. The overall cost of delaying the purchase for 10 years is $2,720 over the life of the policy.
Additionally, waiting to purchase life insurance can have a greater impact on an attempt to purchase a policy. Medical conditions are more likely to develop as an individual grows older. If a serious medical condition arises, a policy can be rated by the life underwriter, which could lead to higher premium payments or the possibility that the application for coverage can be declined outright.
When Is the Best Time To Get Life Insurance?
The younger and healthier you are, the lower the cost of a life insurance policy will be. If you are thinking about starting a family, it is often smart to buy life insurance at that time, making it more affordable in the long run.
What Life Insurance Should I Get When I Have a Baby?
If you have children, life insurance can provide much-needed financial support in the event of an untimely death. In terms of amount, the death benefit should be enough to cover all of your existing debts and obligations, replace your income for the years that your children would still rely on you, and be able to also pay for things like a college education.
When Should I Buy Term Life Insurance?
Term life insurance can be the more cost-effective option when you only need the death benefit for a limited number of years, and not for your entire life into old age. This will depend on everyone’s own individual assessment and financial situation. Talk with an insurance agent or broker to help you decide what is best.
When Should I Buy Life Insurance for My Child?
Life insurance policies can be taken out on children soon after they are born. A permanent life insurance policy for a young child will come with a far lower premium than for when that person is an adult. At age 18, you can then transfer the insurance policy over to the child so that they will have coverage going forward.
Should I Buy Life Insurance When I Am Young and Single?
This all depends on if you think that you will start a family in the future. If so, it’s good to buy insurance when you are younger, when it is more affordable. You may also want life insurance to establish an estate, give to charity, or repay debts and obligations upon your death, whether or not are single.
The Bottom Line
The longer you wait to buy life insurance, the more expensive it will get. Moreover, if you wait, you run the risk of deteriorating health, which may make you ineligible for some life insurance at that point. When you should get life insurance will depend on your personal and family situation, along with your finances and obligations. But in general, life insurance is less expensive when you are young.
If money is tight, a term life insurance policy can offer a financial safety net for your family. If you purchase permanent life insurance, owning it over many years will give the cash-value component of the policy time to grow.