As a young adult, you’re likely near the bottom of your earning potential. You may be repaying student loan debt while trying to save a little for the future home and family you hope to have. At the same time, you want to enjoy adulthood as much as possible by traveling or hanging out with friends.
So that last thing you want to spend your limited income on is a bunch of insurance policies.
Welcome to adulthood.
Insurance is critical in the lives of young adults. It can help them avoid major financial losses.
As you purchase coverage on your health, your income, and your property, it’s important in this beginning stage of life to find a balance between adequate coverage and affordable coverage.
Here are the five types of insurance that all young adults should have and ways to save on your coverage.
Health insurance for young adults
Since 2019, the federal government no longer requires health insurance coverage. However, five states and the District of Columbia may assess a penalty for not having health insurance, including:
- New Jersey
- Rhode Island
Without a federal mandate, young people may be tempted to go without health insurance. It’s easy to roll the dice that you won’t become seriously ill or injured rather than pay the potentially high cost of coverage.
However, more than two-thirds of personal bankruptcies are attributed to medical debt. Although having health insurance doesn’t eliminate out-of-pocket medical bills, it can help cover a majority of those costs.
Depending on your policy, health may pay some or all of the cost of doctor visits, prescription drugs, hospital stays, and surgical procedures. Many people get group coverage through their employer. This is usually an affordable option for young people because the employer subsidizes much of the premium cost.
If you don’t have a group health insurance option, you will have to buy your own individual health insurance policy. The best way to save money on an individual policy is to go through the Individual Health Insurance Marketplace at HealthCare.gov. What you pay for health insurance through the marketplace is based largely on your income; therefore you can find an affordable plan for your budget.
If you’re under the age of 26, the Affordable Care Act enables you to continue receiving health insurance coverage under your parents’ plan.
If you must get your own coverage, the best way to save money is to get a high deductible health plan (HDHP).
As its name implies, an HDHP has a larger deductible than other health plans. The deductible is what you have to pay for care in full before your insurance benefits take effect.
For 2021, the IRS defines a high deductible health plan as one with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $7,000 for an individual or $14,000 for a family.
Because you’re paying a higher deductible, the premium for an HDHP is lower than it is for other plans. This is a great option for young people who don’t anticipate having regular medical bills. You will save on premiums, but still have coverage in the event you have a serious medical problem.
Another way to take advantage of an HDHP is to enroll in a health savings account (HSA). An HSA is like a personal savings account, only the money is designed to cover health care costs. Only people enrolled in an HDHP can set up an HSA.
Premiums you pay for health insurance and money you contribute to an HSA are tax-deductible.
If you are a full-time student, many colleges and universities offer student health plans.
Dental insurance for young adults
Dental insurance is another expense young adults may opt to skip. However, if you take care of your teeth and see a dentist twice a year, your insurance typically covers 80 percent to 100 percent of preventative care.
Insurance will also help pay for fillings, root canals, extractions, crowns, dentures, and bonding. As a young adult starting out on your own, the last thing you need is a major dental expense you can’t afford.
Keep in mind, however, that dental insurance will typically not cover the full cost of procedures. Basic procedures like fillings and extractions are 70 percent to 80 percent covered. Major procedures are usually only around 50 percent covered.
The top-rated dental plans charge between $20 and $60 a month based on the percentage of procedure costs covered, the deductible, and the annual maximum benefit.
The American Dental Association says that, on average, adults ages 19 to 34 spend approximately $492 on dental work annually.
As with health insurance, many dental plans allow young adults to remain on their parent's plan until they reach age 26. However, the Affordable Care Act does not mandate this as it does with health insurance.
The best option for dental insurance is to buy through your employer’s group plan. If you need an individual plan instead, dental insurance is also available through HealthCare.gov.
You can buy a health insurance plan that includes dental coverage or a separate, stand-alone dental plan. The stand-alone dental plans have two levels of coverage. One charges higher premiums for lower copayments and deductibles, while the other provides lesser coverage with a lower premium amount.
If you are contributing to an HSA as part of your HDHP, you can use the money in that account to cover most dental expenses. This includes regular preventative care, as well as the procedures covered by insurance. Paying for cosmetic dental work with an HSA is not allowed.
Auto insurance for young adults
If you own and/or regularly drive a car, you’re required to have a minimal amount of liability coverage. This ensures that if you damage property or injure somebody while operating your vehicle, the insurance can help pay for the damages.
Unlike other types of insurance, youth is a detriment to buying auto insurance. The younger you are, the more you will pay in premium because of the higher risk of being in an accident.
However, there are ways young people can save on auto insurance:
- Drive safely. Your driving record is one of the main factors that determine your auto insurance rates. Avoid moving violations to keep your rates down. You can also save money by enrolling in a usage-based insurance rating program offered by a number of carriers. These mobile apps can track your driving habits, such as acceleration, braking, and mileage. The better you drive, the more discounts you can qualify for.
- Drive less. It may not be possible to reduce your mileage, but insurers will charge you less if you are on the road less often. Public transportation is one way you can keep your car off the road.
- Drive a car that costs less to insure. The more expensive the car, the more your insurance will cost. Also, some models and vehicle styles (e.g. sports cars) are more involved in accidents than others. Plus, if you take out a loan to buy a car, your lender will require full coverage, whereas an older car paid for in cash should only need liability coverage.
- Get good grades. Many insurers offer discounts for full-time students who maintain a minimum grade point average.
- Maintain good credit. Insurer carriers often use credit scores when calculating your policy rate, provided your state allows it. The better your credit, the better your auto insurance rates.
Life insurance for young adults
Young adults often forgo life insurance. Many don’t have spouses or children who depend on their income. They have other spending priorities, and death is the furthest thing from their minds.
Yet there are several reasons why young adults should have life insurance.
Even if you die without dependents, there will likely be expenses related to your funeral and settling your estate. Any debts you have, including private student loans, will need to be repaid upon your death, especially if somebody has co-signed for a loan.
Even if you don’t have an immediate need for life insurance, there’s one key reason young adults should get covered anyway: It will never be easier or more affordable to buy.
For example, one source showed that the average term life insurance rate per month is just less than $16 for people in their 20s. It increases slightly to just over $16 for those in their 30s. People in their 40s pay an average of $22 while those in their 50s pay just under $48.
Young adults should take advantage of group life insurance coverage they have access to through an employer or membership organization. They should also have their own individual term life insurance policy that isn’t dependent on employment or group membership.
If your budget is limited, you can save money on term insurance by choosing a shorter term. A 10-year term policy is more affordable than a 20-year or 30-year.
It’s also possible to buy a smaller amount of life insurance today and increase your death benefit later as your needs grow.
One way to increase your death benefit amount in later years is to buy a guaranteed purchase option (GPO) rider, sometimes referred to as a guaranteed insurability (GI) rider.
This rider enables you to increase the amount of your coverage without having to go through the underwriting process. There may be limits on how you use this option, such as the amount of death benefit you can add and when you can increase coverage.
Learn More: Life Insurance for Young Adults
Disability insurance for young adults
Once you begin earning an income, you should strongly consider having disability insurance.
Your income is what enables you to have a place to live with food to eat and the other necessities of life. Lose that income because of an inability to work due to an injury or illness and you’ll be back to living with Mom and Dad.
And don’t think it won’t happen to you. According to the Social Security Administration, you have a one in four chance of becoming disabled at some point before reaching retirement.
One way to protect your income is by buying disability insurance. This is a type of policy that pays a monthly benefit, based on a percentage of your income, if a covered injury or illness limits your ability to work.
One of the underwriting factors that determine the cost of disability insurance is age. The younger you are, the less you will spend on coverage. Waiting until you think you can “afford” it will add to the cost.
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One of the concerns about buying disability insurance in one’s 20s is knowing that your income will likely increase in the future.
The solution is to make sure your disability insurance policy includes a future purchase option, similar to what is available on life insurance. It enables a policyholder to increase the amount of coverage at a future date without having to undergo additional underwriting. The added coverage will increase your premium if you elect to exercise the option.
Other ways to save on disability insurance while you’re young include:
- Staying healthy. The underwriting process for disability insurance will include an assessment of your health. The healthier you are at the time of application, the less you will pay in premium.
- Only buy what you need. Disability insurance policies typically include many optional riders and features that add to the overall cost. While some of these features are worth the extra cost, others are too expensive to be of much value.
- Compare disability insurance quotes. Don’t assume that all disability insurance policies are the same. In fact, the premium rates on similar policies with similar features offered by the top six insurers can vary by more than 30 percent.
- Find a multi-life discount program. This type of program provides the cost savings of a group policy with the flexibility and ownership of an individual policy. Basically it requires three or more employees of a common employer to purchase individual disability policies at the same time. Each member of the multi-life program can save anywhere from 10 percent to 25 percent on their premiums.
- Pay your premiums annually. Most insurance companies offer a significant discount if you pay your premiums once per year instead of monthly. In fact, the average cost of paying monthly is 3.9 percent more among the top 6 disability insurance companies than paying annually.
- Consider a graded premium structure. Many disability policies offer a choice between a level or graded premium structure. With a level premium, you pay the same amount for the life of the policy. A graded structure, on the other hand, starts with a lower premium payment that gradually increases over time.
Learn More: Disability Insurance for Young Adults
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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