Life insurance pays out a lump sum or regular income to your loved ones if you die.
Having a policy in place is therefore important if you have family who rely on your income to pay the mortgage and household bills.
But if you are single and in your 20s, you probably don’t have any dependants and probably don’t have to worry about death. So why bother with life insurance?
There is in fact a very good reason to buy life insurance when you are young: it’s cheap.
Low cost cover
Insurance companies take into account a number of factors when they set premiums for life insurance, primarily your age, health and lifestyle.
This is because they are basically trying to calculate the likelihood of a claim. In other words, are you likely to die within the policy term?
The higher the risk of a claim, the higher the premium.
Let’s say you’re 25 years old and you decide to arrange life insurance over 25 years.
If you are fit and healthy, you’re unlikely to die before the age of 50, so the insurer will not have to pay a claim during the term of the policy.
This means the cost of the policy will be low – perhaps as little as £5 a month.
But if a 45-year-old were to take out a similar policy, the insurer would be more wary because there is a greater risk of death within the policy term.
The cost of the policy would therefore be higher.
If our 45-year-old was also a smoker with a poor medical history, the cover would be even more expensive.
Why it pays to buy early
As a rough guide, a policy that costs £5 a month at the age of 25 could cost £10 if you were to arrange cover at 35 and £20 if you waited another 10 years.
So, if you buy your policy early you can secure a good deal. You can also be confident that cover is in place when you eventually need it, perhaps when you start a family.
Be aware though that the cost of cover will be higher if you have a chronic illness or lead an unhealthy lifestyle, or even if you indulge in extreme sports, such as mountaineering or parachuting, or if your occupation is potentially dangerous.
If you decide to apply for life insurance, it’s worth checking that the premiums are guaranteed rather than reviewable.
Guaranteed premiums are fixed, so you pay the same amount throughout the term of the policy, even though you are growing older and your health is possibly deteriorating.
Reviewable premiums, on the other hand, are typically reviewed every five or 10 years – and they usually go up.
Don’t worry about locking into a fixed premium and getting stuck on a poor deal. You can always switch your life insurance policy if you later discover that the premium is not competitive. You can often save money by switching, even though you are older.
Update your cover
Try not to forget about your life insurance if you arrange a policy when you are young.
If, for example, you have a baby or take on a mortgage, it’s always best to ensure you have enough cover at each of these life stages.
Death in service benefit
Young people can get a good deal on life insurance, but it’s worth checking if your employer offers a death in service benefit before you take out your own life policy.
Death in service benefit typically pays out a lump sum equivalent to four times your salary if you die while employed by the company.
If your employer offers this benefit, you might decide you don’t need to buy much – if any – life insurance.
But keep in mind that if you leave the company you will no longer have that benefit and if you decide to buy your own life insurance policy, you might have to pay a higher price.