At TermLife2Go, we strive to educate our visitors on the ins and outs of the life insurance marketplace. In the following article on the advantages and disadvantages of life insurance, we hope to demystify life insurance and provide our readers with a breakdown of the pros and cons of life insurance.
For the oldest life insurance companies in the market, they can date back to the mid 1800s and their premise remains largely the same today – help individuals to protect loved ones and leave some money behind to cover costs after they die.
In this article, we will discuss the ways the death benefit can be a huge advantage, but we will also touch on other benefits that extend, not to the beneficiary, but to the owner of the policy.
Advantages of Life Insurance
There are two main types of life insurance policies – term life vs whole life insurance. Go ahead and click on the links if you need to familiarize yourself with the different policy options available.
In the following section we will attempt to address all the advantage of life insurance. We have lumped the advantages of term life and permanent life insurance into one all-encompassing section.
6 Top Advantages of Life Insurance
First and foremost, one primary advantage of life insurance is the death benefit. Dying with no life insurance can create all sorts of financial and emotional problems for those you leave behind.
For example, your family may have to find money for debts, mortgage, bills, funeral expenses, income replacement and more.
There is a huge advantage to having a life insurance policy in force that will pay a death benefit will go to your life insurance beneficiary, which they can use however they wish.
For example, they could pay off the mortgage, replace lost income, or pay off any large debts, such as student loans.
For the length of your level term life insurance or for the rest of your life with whole life insurance with cash value, you can rest worry free that your family is provided for should you die prematurely.
You see, there really is no replacement for the satisfaction you get once you have life insurance in force and you know your family’s financial needs will be met if you die.
You can choose 10, 20, or 30 year term life insurance. There is even a 35 year return of premium life insurance policy available. Each policy has a conversion option to permanent coverage, and also turns into annual renewable term to age 90 or 95 once the policy expires.
Another option is permanent life insurance which lasts your entire life. Among the many options are:
Whole life insurance which offers
- 10 or 20 limited pay,
- whole life to age 65,
- or whole life to 100.
There is also universal life insurance which includes
- Guaranteed universal life
- Indexed universal life
- Variable universal life
- Survivorship life
Apart from return of premium policies, term life insurance does not have cash value. However, if you were to go for a permanent policy, you will be eligible for cash value life insurance.
Depending on the design of the policy, your cash value will grow over time. By adding certain life insurance riders to the policy, such as paid up additions, you can supercharge the cash value growth.
The advantage of cash value life insurance is that you can use the cash to fund many purchases down the road, such as paying off debt, buying a home, investing in real estate, of simply living off the dividends as a form of passive income.
Advantages of Cash Value Life Insurance:
- Cash value grows tax deferred
- True compound interest as your principle is left undisturbed
- Tax free withdrawals and policy loans
- policy loans do not have to be repaid; you choose your own repayment schedule and amount
- policy loans do not show up on your credit report
- Income tax free death benefit
- Living benefits
- Different benefits including accelerated benefits which pay a portion of your death benefit while you are still alive if you are diagnosed terminally ill
- Distributions are not considered in calculating Affordable Care Act taxes on investment income, income taxes on Social Security benefits, or in calculating Medicare premiums.
- Provides an excellent source of supplemental retirement income
- Protected under certain state laws against creditors
Not only is a life insurance death benefit not taxable, the cash value accumulation and any dividends accumulate tax deferred. And if you use policy loans you may never have to pay taxes on your cash value growth.
Further, all policy loans are free from income tax, and even most cash value withdrawals are tax-free as long as it doesn’t surpass the premiums paid into the policy, i.e. your basis.
Another advantage of a life insurance policy is that you have great flexibility over what company you choose, the policy, coverage, duration, beneficiary, and more.
Even after you have passed away, most insurers will allow the death benefit to be spent on whatever is required rather than forcing your loved ones to spend it in certain areas.
Depending on the type of policy you choose, after the policy is in effect and has been for many years, there are various things that can be done to adjust, including lowering the premiums. If your income decreases, you might be able to decrease your premiums and death benefit with an option to increase it once more in the future.
Finally, we should also mention that life insurance rates are now extremely affordable, particularly term life, thanks to people living longer than ever.
Further, as one company competes with the next, cheap life insurance is in abundance.
And your own decisions will affect the price and this comes back down to flexibility once again.
- Are you happy with doing a medical exam or do you prefer life insurance with no medical exam?
- Do you need any riders attached to your policy?
- Are you looking for term life or permanent insurance?
Overall, there are many decisions you can make to find the most affordable life insurance in the marketplace.
5 Disadvantages of Life Insurance
Currently, life insurance is seen as a luxury in the market, which means that we constantly think about what we could be spending the money on elsewhere. If we didn’t have to pay premiums (which we legally don’t), we wonder where the extra money could go.
Eventually, we think about it so much that we end up forgetting all about life insurance.
To this, we have one thing to say – will your loved ones forget about the decision if you were to pass away? Despite the devastating impact that no life insurance has on loved ones, we continue to leave them behind with a struggle on their hands.
With life insurance, there shouldn’t be an opportunity cost because you are spending money on keeping your family protected. With a life insurance policy, you are ensuring that your family can pay bills, your children can go to school, your partner can pay the mortgage, etc. Surely there isn’t too many expenditures as important as this one?
Also, did you know that for the price of around 3 Starbucks specialty coffee’s you can get $250,000 of life insurance if you are young? And for the price of your monthly cell phone or cable bill you could get an awesome whole life insurance policy.
For young people, the topic can be rather tricky and many will not take the plunge because they have too many questions.
If you choose whole life insurance at a young age, the premiums will be much higher than a term life policy. However, the advantage is that you can choose a policy that is paid up in 10 years and you will never have to make another premium.Further, as you age, term life premiums go up.
If you were to go for a term life policy, you will have to pay more in the future when the policy expires because you will be older and there is always a risk of having medical conditions and being placed into the high risk life insurance category.
Therefore, the younger generations are caught halfway between the benefits and drawbacks of both types of policies, term and permanent.
This being said, there are now solutions on the market which could prove useful.
For example, the ‘Return of Premium’ rider will see all premiums returned at the end of a term life policy.
And another option, the ‘Conversion’ rider will allow you to convert your term life insurance policy into a permanent one with no evidence of insurability required.
Here is a tip: give a life insurance agency that represents multiple carriers a call to get unbiased advice — an agency such as TermLife2Go.
If you have no dependents or have money saved up for your final expenses and burial costs with no other debts, life insurance isn’t necessarily a must.
If you have a partner and children who rely on your income, then life insurance becomes very important for everyone involved.
If you are young and have no real debt and no dependents, perhaps you can forego coverage at this time. But consider this:
Student loan debt where your parents are co-signors
It may surprise you to learn that although student loans are forgivable upon death, the forgiven portion is still attributable as income to your estate in the year you died. So if your $100,000 debt is forgiven, you, or your co-signor, may still be on the hook in the form of income tax on the forgiven amount.
Protect Your Future Insurability
Securing life insurance while you are young has several advantages. One is the cost is lower, since age is a primary factor when determining life insurance rates.
Another advantage to life insurance while you are young is that you protect your future insurability. If you develop some disease or illness, it could prevent you from getting coverage later in life, or make the coverage too expensive.
You should also consider the value of a properly designed permanent life insurance policy that builds cash value over your entire life. Anyone who gets permanent coverage later in life sees the value of the policy and most wish they had got some coverage earlier in life so the policy had longer to grow and develop. The longer you have a whole life policy, the more efficient and effective it becomes.
We know that the life insurance market can be a tricky one to understand. As a result, the majority of people seem to forget about it all together – if you do this, you can’t benefit from everything we saw previously.
That is why we tirelessly put out great articles such as this one that help our potential clients gain the knowledge and expertise they need to make an informed decision.
If you need help with your life insurance decisions, feel free to take a look around our site and contact us with any questions.
Finally, there are also people who lack the trust in the huge corporations and they don’t want to give money away to a company that could collapse at any moment.
For example, if there was a major financial collapse like the one we saw in 2008, would the company be able to survive and keep your policy going? Of all the concerns, this is one of the largest and it is fair. However, it isn’t quite justified.
In our reviews, you will see just how financially comfortable the best rated life insurance companies are and you can see this via their A.M. Best rating.
For many decades, A.M. Best has been an agency that has rated the finances of the largest companies in the US.
As long as you choose a company that has a strong financial rating and outlook for the future, you can be confident that your policy will be safe.
When we say ‘large insurance companies’, this is actually a bit of an understatement because they place billions of dollars of life insurance in force every single year.
Nowadays, there is no need to worry about the legitimacy of life insurance companies as long as you choose one that is financially secure.
Advantages and Disadvantages of Life Insurance Conclusion
There we have it, the advantages and disadvantages of life insurance. Using this list, you should be able to assess whether life insurance is right for you.
Furthermore, you should have also learned a few tips when it comes to the process of buying insurance itself and the many choices you have.
So, what are you waiting for? Give us a call today or visit our Life Insurance Quotes page and see what we can do for you!
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