Life insurance is an investment that you might want to think about adding to your budget. If you are thinking about having additional financial security for your loved ones, then life insurance is a good idea. Your life insurance policy provides proceeds that your loved ones can use to pay final expenses, get rid of any outstanding debt, and even pay for daily expenses. If you cannot decide whether or not life insurance policies are worth the trouble, then you need to think about what you need and what policy will suit your situation. This article will tell you about the pros and cons of life insurance policies.
What Are Life Insurance Policies?
You have probably heard the term life insurance before. But, what is life insurance? Life insurance is a contract between you and a policy owner. As an insurer, you will pay a premium to the policy owner throughout your lifetime. Life insurance policies guarantee the insurer that funds reach their loved ones when the insured dies. As part of a valid life insurance policy, the application must provide the past and current health conditions of the insured; that is, the only way for the life insurance policy to remain active.
Types of Life Insurance
If you want to know whether life insurance is a good investment or not, then you should know the different types of life insurance policies you can buy. There are different forms of life insurance plans. But, policy owners typically categorize life insurance plans into two types: permanent and term. Term life insurance is a life insurance plan that covers you for a set period of time. You can buy a 20-year or 30-year term life insurance policy. With these types of policies, they operate the same as other insurance policies you might have. You will need to pay a premium every month. If anything unfortunate happens, then a benefit is disbursed to your loved ones or the insured.
As for permanent life insurance, it covers you for as long as you pay the premiums. There are types of permanent life insurance policies that hold an investment component. This will allow you to accumulate cash value. When you hear life insurance being labeled as an investment, it refers to the cash-value component of permanent life insurance. You will be able to invest and borrow from this fund, if you have a permanent life insurance policy.
Are Life Insurance Policies Worth It? Pros and Cons of Permanent Life Insurance
Like everything in life, you will find that there are benefits and drawbacks to permanent life insurance. Many people use permanent life insurance as an investment. But, there are more benefits to permanent life insurance than that. There are four main benefits to permanent life insurance policies. These include: tax-deferred growth, lifetime coverage, borrowing against cash value, and accelerated benefits.
Tax Deferred Growth
As mentioned above, permanent life insurance policies have an investment component. The investment component allows you to financially grow on a tax-deferred basis. This means that you do not need to pay taxes on any interest, dividends, or capital gains on the cash-value component of your permanent life insurance policy. You will not need to worry about that until you withdraw the proceeds. Similar to tax benefits you can receive with some retirement accounts, you will not need to worry about taxes until you withdraw the proceeds.
Another benefit that comes with permanent life insurance is that you do not lose your coverage after a set amount of time. With a term life insurance policy, the term policy expires when you reach the end of the agreed-upon term. On the other hand, permanent life insurance policies cover you for life. In the case that you expect someone to financially depend on you for a long period of time, you might find that permanent life insurance is more suitable for you.
Borrow Against the Cash Value
If you need funds to purchase a home or pay a lot of money at once, then you can borrow against the cash value of your permanent life insurance policy. On the other hand, if you put funds in a tax-advantaged retirement plan like a 401(k) and want to take out the funds for any reason other than retirement, then you will need to pay penalties. There are other retirement plans that make it almost impossible to take out money for large purchases or for any other reason other than retirement.
You might be able to receive from 25% to 100% of your permanent life insurance policy’s death benefit, if you have the unfortunate case of developing a specific condition. If the insurer develops a heart attack, stroke, invasive cancer, or end-stage renal failure, then they might receive accelerated benefits. You can use these accelerated benefits to pay for your medical expenses and enjoy a better quality of life in the final months.
Cons of Permanent Life Insurance
As much as there are many benefits to permanent life insurance, there are also disadvantages to permanent life insurance policies. One of the most important disadvantages that you need to remain aware of is the cost. If you compare term life insurance policies and permanent life insurance policies, then you will find that you will need to pay higher premiums with permanent life insurance policies. In the case that you do not need lifetime coverage, then you will not need permanent life insurance.
Additionally, there are tax implications to permanent life insurance, if you decide to surrender a policy or if you pass away with a loan outstanding. If you take a loan or use accelerated benefits, then you can reduce the death benefit that your beneficiaries receive when you pass away. You need to keep this in mind when you consider buying a permanent life insurance policy.
Benefits of Term Life Insurance
If you do not think that you need lifetime coverage, then you should think about term life insurance. There are many benefits that come with term life insurance policies. In general, term life insurance policies are cheaper to buy than permanent life insurance. This is because the insurance company sees less risk, since you are buying insurance for a certain period of time. If you are young and healthy when you purchase a term life insurance policy, then you will find that the premiums are cheaper. Additionally, you can choose how long you want the insurance policy to cover you. With term life insurance, you will find that it is more flexible, in terms of duration of coverage. On the other hand, permanent life insurance policies do not have a fixed expiration date.
Cons of Term Life Insurance
Unlike permanent life insurance policies, term life insurance policies do not have any cash value and furthermore do not have an investment component. If you are still alive when your term expires, then the policy simply ends. This means that you and your beneficiaries will not see the money that you were paying towards. You can think of term life insurance policies as paying small funds for some peace of mind. In the unfortunate event of your death, term life insurance will provide your beneficiaries with a death benefit.
Conclusion: Is Life Insurance A Good Investment?
Overall, buying life insurance is a big change to your lifestyle and your financial plan. You will need to pay premiums every month to receive life insurance. In the event of death, the insured will receive funds that can help cover any outstanding debt or even day-to-day expenses. There are two types of life insurance policies: permanent life insurance and term life insurance. Permanent life insurance covers you for life, while term life insurance covers you for a certain period of time. Make sure that you find out which type of life insurance best suits your needs, before you buy a life insurance policy.