The primary purpose for getting life insurance will always be to protect
the people you care about in case something were to happen to you. How much
capital would you need in order to pay off debts, support your loved ones, or
to take care of all your affairs?
After you understand what priorities you would like to protect through life
insurance it is fairly easy to determine the correct amount of coverage.
What Type Of Life Insurance
The next question is what type of coverage will best serve your needs. In
order to get the right amount of coverage you also have to make sure that the
premiums fit comfortably into your budget.
Term Insurance Benefits
Term insurance is less expensive than whole life insurance, because you are
renting the insurance. Your coverage is considered pure insurance in this case,
because it doesn't develop cash value or participate in company dividends.
Instead it allows you to get the right amount of protection for the least
expensive premiums available. Term insurance has also developed over the years
to offer more comprehensive options. You can get a return-of-premiums policy
where you pay more during the life of the policy, but the insurance company
refunds all of your premiums at the end of the fixed term.
There are also term policies that allow you to lock in your age and health
for the remainder of your life, so that you can have the coverage and premiums
locked in for the rest of your life. This is a great and inexpensive way to
obtain permanent insurance.
How Long Should You Lock In Your Premiums
The longer you can lock in your premiums the more advantageous it will be
in the long run. The insurance company takes into consideration the mortality
risk during the level period of the term. If you are 35 and you get a level
20-term policy then the rates will be fixed until you are 55. And because you
are locking in the premiums at a younger age, the average risk and rates will
be less than if you were to lock in your premiums at 55.
Most people have an insurance need that will last throughout the rest of
their lives. If you can permanently lock in a portion of your insurance at a
younger age this can save you substantially on premiums. It happens quite often
where people will have to apply for new coverage after the fixed rates on their
current policy have expired, and because they are now older and have to pay
much more in premiums.
Your health is also locked in when you first take the policy out. Many
people looking for insurance in their fifties or sixties are dealing with some
type of medical condition that makes the cost of life insurance double or
triple in cost. The same logic that applies to locking in your age is also good
to keep in mind when locking in your health. We don't know what is going to
happen to us, and if we have our insurance locked in then our insurability and
premiums will be unaffected by a medical event.
Level Term Insurance
I always recommend getting a level-term policy as opposed to one that will
start off lower and increase premiums each and every year. The level term
policies allow you to lock in your age and health for the remainder of the
term, whereas the increasing-premium policies become more expensive every year
based on your new age.
Because term insurance is a less expensive way to get the right amount of
protection, I believe that it is the right choice for a large majority of
people looking at life insurance.
Cash Value Life Insurance: When To Consider It
First A Word Of Caution About How The Life Insurance Industry Operates
An agent who pushes one company above the others is doing his or her
clients a disservice. Every company has its positives and negatives and each
company has focused on certain demographics to try to create a competitive
edge. There are 17 life insurance companies in the fortune 500 alone. These
companies have very similar investment portfolios and conduct business in ways
that are more common than not. Eight of these companies are mutual, nine are
stock companies, and they all operate in order to make a profit. The most
important thing that anybody can do is to have an agent who can help them shop
the market for the company that is going to fit their needs best. Somebody that
is a smoker with high blood pressure is going to have better options outside of
the companies that target nonsmokers without health conditions. Finding the
least expensive company on the market for your age and health can save you
thousands of dollars.
I used to work for an insurance agency where we only sold a single
triple-A-rated-insurance company. When I worked for this agency, my fellow
agents and I were especially inculcated with the benefits of this company's
whole life insurance. This situation is not unique.
Captive agencies have managers that groom agents to push one company
because they get paid commissions when their agents sell these products. Please
don't assume that life insurance agents are experts on the benefits of
different companies and types of insurance plans, because many of them are
unaware of the benefits beyond their own company. Instead of consulting their
clients and shopping the market they push a single product that doesn't always
match up well. There are far too many people being given advice from agents to
consider whole life insurance, because they are trained to present the same
products to every client.
When You Are Considering An Insurance Company It Will Always Be
Advantageous For Some People And Ill Advised For Others
If you sit down with an agent who goes over a list of benefits about a
single insurance company, keep in mind that most benefits are really
trade-offs. For instance, if a company is a triple-A rated insurance company
than they are probably also more conservative with whom they insure. A triple-A
rating is great, but it is really only necessary if you plan on participating
in the companies dividends, or in other words buying their whole life
insurance. There is no need to pay extra money for the privilege of having a
triple-A rated company as many agents insist. A.M. Best considers a company
with an A-rating to be in excellent financial health and there are many A-rated
companies with less expensive insurance offers if you are not planning on
participating in whole life.
When Whole Life Insurance is a Good Idea
For some people, whole life insurance can be a great complement to their
financial security. I have sold whole life insurance based on the following
benefits.
1) It has a guaranteed return that will consistently build up the cash value in the policy.
2) It gives policyholders permanent insurance so that they are insured throughout their lifetime.
3) It allows them to stop paying premiums after a certain number of years, because the dividends from the company will be enough to keep the policy in force.
4) It allows policyholders to take cash from the policy in the form of a loan, so that you have another option if liquidity is needed.
5) The growth of the policy is tax deferred and tax-free as long as long as the policy is kept in force.
1) It has a guaranteed return that will consistently build up the cash value in the policy.
2) It gives policyholders permanent insurance so that they are insured throughout their lifetime.
3) It allows them to stop paying premiums after a certain number of years, because the dividends from the company will be enough to keep the policy in force.
4) It allows policyholders to take cash from the policy in the form of a loan, so that you have another option if liquidity is needed.
5) The growth of the policy is tax deferred and tax-free as long as long as the policy is kept in force.
The problem can be that many of these benefits point to life insurance as
an asset or investment. Life insurance should always be considered for the
death benefit first and foremost. If you have already maxed out both your Roth
Ira and 401(k), have at least three months of expenses in accessible savings,
and are looking for something else to build up savings then whole-life
insurance can be a good option. The point is that whole life insurance is a
good choice when you have the ability to max out your qualified retirement
funds and are looking to complement your savings with a conservative tie in to
your life insurance.
Whole life can be a mistake for a couple of reasons
There are risks when putting your money into whole life insurance. The
risks aren't always clearly explained, because the agents focus on the
guaranteed dividends that will grow the cash value every year. However, one
significant risk is buying into whole-life insurance, paying the premiums for a
number of years, and then not being able to keep up with the premiums down the
road. Life insurance companies bank on this happening to a certain percentage
of policyholders.
If this occurs you are in danger of losing thousands of dollars in paid premiums without the benefit of accumulating any cash value. When a policy lapses or you can't keep up with whole life premiums then the insurance company will retain your premiums without you having any cash value built up or any insurance in force.
These whole life polices are structured to have large front end expenses and it will take at least a couple of years before your premiums start to build up cash value. It takes about ten years before the amount of premiums you put into the policy will equal the cash value in the policy.
If this occurs you are in danger of losing thousands of dollars in paid premiums without the benefit of accumulating any cash value. When a policy lapses or you can't keep up with whole life premiums then the insurance company will retain your premiums without you having any cash value built up or any insurance in force.
These whole life polices are structured to have large front end expenses and it will take at least a couple of years before your premiums start to build up cash value. It takes about ten years before the amount of premiums you put into the policy will equal the cash value in the policy.
How Cash Value In Whole Life Insurance Works
The other risk with whole life insurance is not understanding how the cash
value in the policy works and taking out too much of it. The cash value in the
policy is liquid, but the insurance company will let you take out about 97% of
it in order to protect against the policy lapsing. Any cash that is taken out
of the policy is loaned from the policy at interest.
Lets assume that you are in the first 20 years of your whole life policy
and are taking a loan from the cash value in the policy. The loaned interest
rate is 8.0 %, the non-loaned dividend interest rate is 6.85%, and the
loaned-dividend interest is rate is 7.9 %. Notice that the insurance company
steps up the interest rate on the loaned amount or the amount borrowed from
your cash value. This mitigates the cost of the loan, but the loan still creates
an ongoing obligation to pay interest. For instance the cost of borrowing here
would be 6.95 %.
(The loaned interest rate (8.0 %) + (the non-loaned dividend interest rate
(6.85%) - the loaned-dividend interest rate (7.9%)) = cost of borrowing
(6.95%).
The cash value in the policy is really a double-edged sword, because it
leads to a significant risk that you will not be able to keep up with the
premiums. It is practically intended for people who can repay the loan quickly
so that the policy continues to develop dividends instead of an obligation to
pay interest. It is great for people who aren't ever tempted to borrow from the
policy, because the dividends will compound and eventually be able to cover the
cost of annual premiums. When this occurs the risk of lapsing will be
negligible. However, this takes quite some time to achieve and it truly depends
on how disciplined you can afford to be with the additional cost of these
premiums. If you would rather have control of your money up front there is an
argument that you can buy term and invest the rest instead of leveraging the
insurance companies general fund.
Your Personality Profile And Budget Must Be In Line
I recommend taking a look at both your budget and how much control you want
over your money for at least the next ten years if you are considering whole
life. Because term insurance can now permanently lock in your age and health in
the same manner as whole life insurance, the biggest question is whether or not
you want control over investing the difference in premiums. Many people prefer
whole life insurance because they don't have to think about investing the
difference; the insurance company does it for them. They can also grow their
death benefit by the amount of growth in cash value and act as their own
creditor if they ever want to borrow cash from the policy.
A Couple Other Points About Whole Life Insurance
The cash value component in a whole life insurance policy needs to be
addressed. The first is that cash value is based on compounding dividends. So
the longer you keep the paying premiums the more advantageous it is. The second
is that if you go with a reliable insurance company they will usually pay
non-guaranteed dividends that are based on the results of an insurance
companies investments. This is when rating is important to consider, because
you are now participating in these dividends. Also if you have allowed the cash
value to grow and take out modest loans from the policy later in life, you will
most likely have enough in dividends to keep pace beyond the ongoing obligation
of interest. However if you do surrender the policy the gains will be taxed as
capital gains and you will have to pay a surrender charge as well. If the
policy is in force and you pass away while there are still outstanding loans,
the death benefit will be paid out after it covers the cost of the loans that
you have taken from the policy.
Term Insurance Vs. Whole Life
I believe the most important factor in all of this is the human element. If
you are patient, conservative, and comfortably able to continue paying premiums
without the temptation to borrow from the cash-value then you are a good
candidate for whole life insurance. The majority of people have fluctuating
budgets and circumstances where they are better off with something that locks
in their age and health and gives them the opportunity to invest the difference
elsewhere.
If you are looking to find the right type of insurance look no further. I
am a licensed agent, business owner, and financial author and my goal is to
consult people on the best options available in the life insurance market. I am
licensed in over ten states and have helped thousands of people find a policy
based on their priorities and saving them money. To get a free online quote go
to:
[http://www.cheapinsurancedirectory.com/]
Or if you would like to speak to me and have me personally shop the market
for the guaranteed-cheapest insurance available call 1-888-611-2688. I will
talk to you about your priorities and give you a FREE-NO-OBLIGATION REPORT on
the least expensive insurance for your age, health, and circumstances. If you
are satisfied with report's results the process of insuring your family can all
be done online or over the phone to save you time as well. Please call me now
at 1-888-611-2688 and I will work to save you thousands of dollars on your life
insurance!
Article Source: http://EzineArticles.com/7165008
