The younger you are, the less of a risk you pose to the insurer
It’s a common misconception that life insurance is only for those who are older or in ill health.
Actually, the optimum time for purchasing life insurance cover is when you least think you’ll need it.
Life insurance premiums are calculated based on the likelihood of making a claim.
Therefore, the younger and healthier you are, the less of a risk you pose to the insurer. As a result, you benefit from lower monthly premiums.
Did you know a 30-year-old can secure life insurance protection for as little as 20p-a-day?
Despite this, 65% of 18-29-year-olds don’t have any life insurance in place[1].
This highlights the benefit of arranging your life insurance as a young adult. However, if you’re unlikely to claim, what’s the point?
Let’s take a look at why.
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Generally speaking, life insurance pay outs are commonly used to:
- Settle outstanding debts, including paying off your mortgage
- Leave an inheritance to loved ones
- Maintain the ongoing lifestyle of your family
- Cover the cost of your funeral.
In young adulthood, it’s easy to overlook aspects like your funeral or leaving an inheritance.
You may not even have a mortgage or started a family yet.
But life insurance policies can last for over 40 years, during which time many of the above are likely to come into play.
The cost of life insurance is calculated at the point of application. Any changes, including your health, during the policy won’t increase your premiums.
Therefore, taking out a policy whilst you’re young allows you to benefit from low-cost premiums, even as your lifestyle and responsibilities evolve.
It also means you’ll avoid paying higher premiums if you were to fall ill in later life.
Young adults with dependants
When you’re young it’s easy to overlook the impact your passing would have on loved ones.
Aside from the emotional turmoil caused, there are also financial concerns which should also be taken into consideration.
Typically, there are two types of young adults; those with dependants and those without.
A dependant refers to someone which is affected by your financial stability, for example, a child or a partner.
It’s easier to understand the importance of life insurance for those with children in their lives.
In the event of your death, all outstanding balances (such as your mortgage or credit cards) are settled by the value of your estate.
This means that any savings you have and any property you own will be used to cover the outstanding costs in your name.
This can cause severe financial instability for your dependants, particularly if the home used to settle your debts is the one in which they live.
If they can’t cover the outstanding debts, the family home may need to be sold and they’ll be required to find somewhere else to reside.
It is also important to consider the cost of your funeral.
The average cost of dying has increased by nearly £2,681 in the last decade and stands at £9,493 today[2].
This is also a cost which will need to be funded by your estate or loved ones.
Having adequate life insurance in place can ensure that all of the aforementioned costs are covered.
Young adults without dependants
With regards to young adults without dependants it can be more difficult to see the benefits of having life insurance.
However, something which is often overlooked is the total cost of dying.
The average cost of a funeral has risen by +130% over the past 16 years and is unaffected by the age you are when you die.
This leaves the overall cost of dying at £9,493 and this figure is forecast to continue rising.
What many young adults overlook is that this expense is covered by your family if the estate isn’t sufficient to cover these costs.
To many families, this sum is significant and could cause a huge financial strain for your parents.
Having adequate life insurance in place ensures that these costs are covered, avoiding your loved ones from having to pay for your funeral.
Other outgoings you may not have considered
Debt in the UK is on the increase and is particularly prevalent amongst young adults.
Do you have any of the following?
- Credit cards
- Store cards
- An overdraft
- Rental agreement
- Car finance
- Any other form of payment plan.
The remaining balance of each of these would be repayable upon your passing.
Whilst debts don’t become the individual responsibility of others, the outstanding balances will be recovered from your estate.
This refers to any value you have in your name from bank accounts, to possessions and property.
If you were to die with no assets, the balance of your debt is written off but there’ll be no legacy to leave behind for loved ones.
In some instances, payment plans or rental agreements are put in place with the use of a guarantor, (usually a parent).
If this is the case, your death could mean the responsibility of this outgoing becomes theirs.
The pay out from your life insurance could be used to cover the remaining balance of any debt in your name.
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First-time buyers
Whilst it isn’t a legal requirement to have life insurance when purchasing a property, it’s usually recommended.
Without life insurance, your death could mean that the house is repossessed or sold to cover any outstanding debt.
The average age of a first-time buyer in the UK is now 30[3].
Whilst there may be no dependants who rely on this as their home at the time of purchase, it’s a strong possibility in the future.
Taking out life insurance at the point of purchase means you’ll benefit from locking in low premiums due to your age.
Therefore, you can rest assured that if the worst were to happen, your mortgage would be covered.
Term-based life insurance for young adults
The most common forms of life insurance arranged by young adults are term-based.
This refers to a policy which provides cover for a specified period of time. If you die within this time frame, a pay out is made to those named on your policy.
There are two main types of term-based life insurance.
Level term life insurance – This is likely to be the most suitable policy type for those looking to protect future assets.
For example, if you’re likely to have a family and/or purchase a property but haven’t yet.
The sum assured with level term cover holds it’s value throughout the policy term. Making it suitable to cover an interest-only mortgage.
This means that whether you die 2 or 20 years into the policy, the amount received by your loved ones remains the same.
Decreasing term life insurance – Unlike level term cover, the sum assured with decreasing term cover reduces throughout the policy term.
For this reason, decreasing term life insurance is well suited to cover the outstanding balance of a repayment mortgage.
With either policy type, it’s possible to outlive your policy and not receive a pay out.
Life insurance for under 30s
For many under the age of 30, the main financial focus is keeping up with day-to-day outgoings.
As a result, you may be reluctant to take on another monthly outgoing.
However, taking out life insurance now could save you money in the long run.
For those under 30, life insurance premiums are significantly cheaper due to the reduced risk you pose.
As previously stated, ongoing changes (particularly to your health) will not cause your premiums to increase once your policy is live.
Life insurance for young parents
The average age of becoming a mum in the UK is 30 and a father is 33[4], both of which would be considered young adults.
Having a child is often a defining life event when people start to seriously plan for the future.
Taking out life insurance can ensure that if the worst were to happen to you, your partner would receive the funds required to stay in the family home and support your child.
Alternatively, if you were a single parent or both you and your partner were to die simultaneously, your child would be provided for.
In instances where the parents are a couple, taking out a joint life insurance policy is an option.
Whilst this will save you approximately 25% compared with paying for two single policies, it will only offer one pay out.
This could mean that not enough cover is in place should you both pass away at the same time, affecting the financial stability of your children.
Therefore, before opting for a joint policy, it’s important to consider whether this will provide you with the level of cover required.
Whole of life insurance for young adults
In the instance of a young person taking out life insurance, it’s unlikely to make financial sense to opt for a whole of life policy.
Whilst whole of life insurance guarantees a pay out, it’s possible, if you live long enough, that you’ll end up paying more into the policy than it will pay out.
If you’re young and healthy, the likelihood of this is high. As a result, most young adults opt for term-based cover.
Life insurance for young smokers
Smoking inevitably increases the cost of your premiums due to the increased likelihood of a claim being made.
However, with age, the additional amount you pay compared to a non-smoker increases.
For example, a 30-year-old smoker can pay on average a third more for their life insurance compared to a non-smoker of a similar age.
But a 50-year-old smoker can pay 50% more than their non-smoking counterpart and this percentage will only continue to grow as they age[5].
Therefore, for smokers, it’s even more beneficial to take out life insurance as young as possible to make sure your premiums are affordable.
How much life insurance do I need?
When determining how much life insurance you need it’s often recommended to calculate the value of what it is you’re looking to cover.
For example; any debt in your name + your mortgage + funeral costs + inheritance + family living cost.
When arranging life cover as a young adult consider the different elements you currently need to protect and those which may come into play in the future.
For example, currently, you may only need to consider the cost of your funeral, but may be looking to buy a property and start a family in the near future.
The sum assured you choose should be capable of covering all aspects.
Taking out enough cover to protect all potential future avenues allows you to lock in lower premiums, utilising your good health and age.
Writing your life insurance in trust
When you pass away your life insurance proceeds form part of your estate.
If your estate exceeds £325,000 you’ll have to pay 40% inheritance tax (IHT) on the excess.
Whilst the £325,000 threshold may not seem relevant for many young adults, a policy of £200,000 coupled with a 1-bedroom flat worth £150,000 already exceeds this by £50,000 before any savings and possessions are factored in.
The good news is, by writing your life insurance policy in trust you can reduce the amount of IHT your loved ones would have to pay.
Writing your policy in trust detaches its value from your estate, meaning that it’ll not be taken into account with regards to the £325,000 threshold.
It’ll also mean that your loved ones won’t have to go through probate in order to gain access to a pay out, making the process faster.
Finally writing your life insurance policy in trust allows you to specify who you want the pay out to go to.
It’ll then be the responsibility of your trustee (similar to an executor of a will) to distribute the pay out accordingly.
Writing your policy in trust doesn’t have to be difficult.
At Reassured we offer a dedicated team who’ll walk you through the application process at no cost.
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Whilst it’s inevitably cheaper to take out life insurance when younger, quotes can vary significantly between insurers.
To ensure you’re getting the best cover at the lowest cost, it’s important to compare quotes.
Our award-winning, but completely free, brokerage service enables us to do the hard work for you.
We’ll compare a wide panel of insurers on your behalf, identifying the most competitive policy quotes.
Whether you’re in your 20s or 30s, why not seize the day, lock in the lowest premium and secure your long-term future.
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Sources:
[1] https://www.thebalance.com/why-you-need-life-insurance-in-your-20s-4153427
[2] SunLife (2020), Cost of Dying Report, sunlife.co.uk/costofdying2020
[3] https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/firsttimebuyerhousingaffordabilityinenglandandwales/2017
[4] https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/bulletins/birthsbyparentscharacteristicsinenglandandwales/2015
[5] https://www.confused.com/life-insurance/guides/does-smoking-affect-my-life-insurance-premium