Purchasing a life insurance policy provides for your family or other dependents in the event of your death. You pay an unchanging monthly premium in exchange for a guaranteed death benefit, and premium levels depend on many factors, including the age at which you purchase a policy. Although it’s easy to brush off the idea of life insurance early in life when you have no dependents, this is the ideal time to consider getting a policy in place.
When to Purchase a Policy
The younger you are when you get life insurance, the less you’re likely to spend on premiums. Many people purchase policies for their children at the beginning of life to ensure they have coverage and lock in lower payments. Ownership of the policy can be transferred at age 18.
If your parents didn’t set up a policy for you, it’s a good idea to get one as soon as possible. An “ideal” age for obtaining life insurance is under 35. Premiums increase with age, and common health conditions developing later in life can drive prices up more or even prevent you from qualifying. Premiums never increase, so purchasing life insurance when you’re eligible for lower payments means you’ll pay less over the life of the policy.
In addition to age, life stage is the best indicator of how beneficial a policy will be. Regardless of how old you are, if you have a family with young children, other people who depend on you for support or long-term debt someone else would be responsible for if you died, it’s time to determine which type of policy is best for you.
Term Insurance Explained
Term life insurance policies are the most common. With these policies, you pay a premium each month during a set term to secure a death benefit for your beneficiaries. Term lengths differ but generally last between ten and 30 years. Once the term is over, you no longer have coverage.
Benefits from a term insurance policy cover only your dependents and may be expanded by adding riders to your policy. These can help to cover premium payments if you become disabled or provide an accelerated death benefit should you be diagnosed with a terminal illness.
Term insurance premiums remain the same for the entire length of the term. If you choose to renew the policy after the term runs out, premiums are often higher due to factors such as age, health condition and increased overall costs.
Whole Life Insurance: What is It?
Whole life insurance is a type of permanent life insurance providing lifelong coverage. Like term insurance, premiums are fixed and guarantee a payout when you die.
Whole life insurance also includes a feature known as “cash value,” an investment-style type of saving in which a percentage of each premium payment adds value to the policy. The insurance company pays interest on the cash value at a level based on their annual profits. Although the rate is low compared to other forms of savings, you get the assurance of knowing your money is generating returns throughout your lifetime.
Unlike term insurance, in which the death benefit is provided entirely by policy coverage, increasing cash value in a whole life policy decreases the amount covered by insurance. If you have the policy for a long time, the cash value may be enough to provide the entire benefit with no additional coverage at all.
Benefits of Term vs. Whole
If you’re at a stage of life in which your family would need financial help if you died unexpectedly, term insurance is a good choice. You can pick a term length to cover the years during which aid is essential and pay less than you would for a whole life policy. Term insurance can also be canceled before the term expires, and there are usually no additional fees or complex fine print to deal with.
To get the added benefit of a growing cash value, consider a whole life policy. The gains you enjoy with these policies aren’t subject to taxes, and you can borrow against the growing value any time you need extra cash. Both types of insurance provide coverage for common expenses associated with the end of life, including funeral costs, estate settlement and paying off remaining debts.
The type of life insurance you purchase should provide coverage in line with your goals, your needs and the needs of your family or dependents. Don’t wait until your health is poor and you suddenly “need” a policy. Buying young gets you better rates and a chance to accumulate a little extra money for yourself or your family. Be realistic about your needs, and choose a length and type of coverage with features suited to your lifestyle.