Advantages & Disadvantages of Life Insurance

Category : Insurance

Life insurance, to many, is a necessary evil. Many policyholders swear by them in protecting their families from loss of income and hefty debt obligations in the event of their untimely death.

With several types of life insurance on the market, generally speaking, two varieties still remain the most popular: term and whole life, or "cash value" life insurance. Both varieties have pros and cons.

Identification
Cash value life insurance are policies where monthly premiums are used to pay for the cost of insurance while a portion is placed into attached investment vehicles that grow over time. Some popular cash value life insurance products include variable life, whole life, universal life and paid-up insurance. Despite minor differences, these insurance plans are essentially the same. All cash value life insurance policies contain a death benefit and a cash account that's added to when a client makes a premium payment.
Term life insurance is significantly different than its cash value counterpart. Term life insurance does not contain a cash value account. Premiums are used solely to pay for the cost of coverage. These premiums maintain the level of coverage for a specific "term. " At end of a policy's term, a new policy must be purchased.

Benefits
Both cash value life and term life insurance have their benefits.
The most significant benefit of cash value life insurance is its ability to offer coverage for the entire life of the policyholder. Many people take advantage of buying this type of insurance when they are young when they need it most. Cash value accounts may also be borrowed against or drawn from during the life of the policy. Policyholders are also not required to pay taxes on any interest or earnings attached to cash value accounts.
Individuals and corporations also benefit from term life insurance. The biggest advantage of term life are the often very cheap premiums, especially when a person is young and healthy. It is possible, in many situations, for significantly large face amounts to be purchased for monthly costs of $20 to $30. Term life is good for covering obligations that will eventually end, such as mortgages, automobile loans and educational needs.

Warning
With the benefits of both cash value and term life insurance come a few disadvantages.
The most significant disadvantage of cash value life insurance is the often inconsistency in premiums. Most cash value policies contain required premiums that can increase over time. This can make the policy quite expensive for someone on a budget that wishes to purchase enough coverage to benefit his family in the event of his death. Although many policies contain riders where dividends from cash accounts can be used to pay premiums, such an instance almost always results in taking funds away from the cash value or investment account. There is also never a guarantee that sufficient funds will be available to cover missed premiums in the event a policyholder falls short.
There are also several disadvantages of term insurance, the first being that it is not permanent. Although a policyholder may enjoy extremely cheap premiums when she is young, term products expire after a certain number of years, or when the insured reaches a certain age. When a policy expires, a new one must be purchased. This means that a person must qualify for a new program based on her current age and health in order for coverage to continue. This almost always results in much higher premiums or uninsurability. Some term insurance does, however, contain "re-up" or "renewal" options that may not require proof of insurability to continue coverage.

Misconceptions
When we think of life insurance, we think of a death benefit being paid to a beneficiary upon the death of a policyholder. Although this is true, it is important to know that with some insurance, especially many cash value policies, it's often not that simple.
With many cash value life policies, only a single payout is made upon a policyholder's death, regardless of what the cash value account is worth when he dies. For example, if an individual owns a whole life policy with a death benefit of $100, 000 and a cash value account worth $25, 000, it is common for beneficiaries to expect a payout of $125, 000. This is commonly not the case. In this example, a beneficiary would commonly only receive a total of $100, 000. Because the cash value account is worth $25, 000, the insurance company would only pay $75, 000 as a death benefit, with the other $25, 000 coming from the cash value account. With some products, however, beneficiaries are in fact entitled to receive death benefits in addition to cash value accounts when their loved one dies. However, usually an amount equal to the policy's face value is paid upon death. It is important to know this information before purchasing cash value life insurance.

Considerations
It is recommended that you consult with an experienced insurance agent before buying life insurance. It is important to find a life product that is tailored to the specific needs of the individual policyholder and his family. For example, an individual may only need to protect his family from large mortgage obligations for 10 or 15 years. If an individual wishes to be covered by a policy for the remainder of his life, then a cash value policy may be in order.
Research also shows that using life insurance policies as investment vehicles is not a wise move. Long term, it is much more profitable to buy term insurance and take advantage of low premiums and invest in mutual funds or stocks that are not attached to insurance policies.