Many consider life insurance as a necessary evil. However, there is none denying the fact that it provides financial protection to families of policyholders in case of their premature death. Though there are many kinds of life insurance policies available these days, the two varieties that continue to be most popular are: term and whole life, or “cash value”. There are advantages and disadvantages of life insurance of either kind.
Kinds of Insurances
Cash value life insurance policies are those which mainly use premium towards the cost of insurance but a part is also invested in a manner to provide growth of those investments. Popular forms of cash value life insurance policies include whole life, variable life, universal life plus paid-up insurance. Barring minor differences, these are basically the same. All these policies carry death benefits with a cash account that keeps accumulating as you pay premiums.
Term life insurance is considerably different from cash value type. There is no provision for cash value account in this case. Premiums are exclusively used for paying the cost of coverage and they uphold the level of coverage for a definite period, at the end of which, new policy needs to be purchased.
When considering advantages and disadvantages of life insurance, let’s first talk about advantages. The most important advantage of cash value lie insurance is that it provides coverage for the full life of the insured. This policy proves most beneficial if one buys it early during young years. Policyholders may also borrow or withdraw funds while the policy is live and valid. Another important benefit is that earning from cash value accounts are not taxed.
Term life insurance isn’t helpful for individuals alone, companies can also benefit from it. The best point about this policy is low premiums, which are too attractive for young and healthy individuals who can at times procure high value policies by paying nominal monthly premium of twenty to thirty dollars. This policy is recommendable for covering long and short term financial obligations like automobile loan, student loan and mortgages.
As already pointed out there are advantages and disadvantages of life insurance of either type. Now, let’s see the drawbacks of the two kinds of insurances we have been talking about. Avery significant drawback of cash value life insurance is the variation in amount of premiums to be paid. Usually, the premium of this kind of policy goes up with time, making it rather expensive for those with limited budgets, looking to provide adequate coverage to their survivors in case of their untimely death.
Though many policies allow the insured to pay premiums from their dividends from cash accounts, most often it amounts to withdrawal of funds from cash value account. Moreover, one can’t always be sure of the availability of sufficient funds for paying the missed premiums.
Likewise, the term insurance too has many drawbacks, the most important being that it’s not permanent. Though the advantage or low premium is there for young policyholders, after a particular number of years when they reach a certain age, the benefits are not applicable. On expiry of a policy, one needs to buy a new policy, which takes into consideration the present age and state of health of the person seeking insurance. Often, it means paying much higher premiums or getting deprived of insurance. Certain term insurance policies do offer renewal option which may not insist on getting proof that the intended customer is eligible for continuing insurance policy.
On considering advantages and disadvantages of life insurance the first benefit that comes to mind is payment of death benefit to survivors of the deceased. Of course, that is correct but with certain kinds of insurance, typically cash value policies, it is not all that easy.
A number of cash value policies would make only one payment on the death of the policyholder, irrespective of the amount available in cash value account. Here’s an example. Let’s say someone has a whole life policy offering a death benefit of $125,000 plus a cash value account with $25,000.So, the beneficiary would expect a payment of $150,000. This is not the case generally. Usually, the beneficiary gets paid only $125,000. Since balance in the cash value account is $25,000, the insurance company pays only $100,000 as a death benefit; the balance of $25,000 comes from cash value account. However, certain policies entitle beneficiaries to get death benefit plus cash value account on the death of the policyholder. Yet, in most cases only the face value of the policy is paid. When buying a cash value life insurance this point should be clarified and understood.
Before buying any policy one should always consult an insurance agent and look for a policy that matches your requirements. For instance you may like to secure your family against a substantial mortgage for say fifteen years. In case you want an insurance cover for the rest of your lifetime, it will be in order to opt for a cash value policy.
You have to weigh the advantages and disadvantages of life insurance policy you are inclined to buy. Assess if it really helps having life insurance policy as a form of investment. Buying a long term insurance policy, needing payment of low premiums and investing regularly in stocks and mutual funds, not connected with insurance policy, may work out better.