As with most insurance products, the goal of a life insurance policy is to never need to use it. This coverage offers financial protection to your loved ones in the event of your death. If you have a valid policy in place when you die, which means you have paid all of your premiums on time, then your beneficiaries will receive a benefit that replaces the income you provided to them while still alive.
Several different forms of life insurance are available in today’s market to help you meet the specific needs of your family. The two most common policies are called term life insurance and whole life insurance. Each one provides the same basic benefit, but the latter option doesn’t have the same expiration date concerns. That’s why young people typically purchase more term-life products, well those in the 55+ demographic prefer whole life protection.
Despite what many people believe, a person’s estate is still responsible for certain debts even after death. When examining the advantages and disadvantages of life insurance, it is essential to consider a policy that can cover your current obligations while also offering your family enough income to continue providing for five years after you’re gone.
List of the Advantages of Life Insurance
1. Life insurance pays a benefit when you might need it the most.
The primary advantage to consider with a life insurance policy is the benefit that it pays to your surviving family members or designated heir. As long as you can stay current on your monthly premiums, then your policy will protect your future financial needs if something unexpected happens. This benefit applies to term-life and whole life insurance products.
The difference between the two involves how the benefit will distribute after you die. A term life insurance policy will end at a certain time, but it will pay a benefit if something unexpected happens to you during its period of validity. A whole life policy pays a death benefit regardless of when you eventually pass away.
2. Predictable premiums are available with life insurance policies.
Whole life insurance policies provide consumers with a predictable monthly premium that must be paid to keep the policy active. The amount that is due will remain the same for as long as you have the policy, regardless of any changes to your health or your age. Some plans allow you to stop making payments eventually when a large enough cash benefit exists from your previous payments, allowing the life insurance to continue indefinitely based on the terms and conditions provide it to you by your agent.
3. Life insurance can be a financial asset for you and your family.
Term-life insurance provides a protection policy so that your family can have access to monetary resources for some time if something unexpected happens to you. When you opt for a whole life policy, then the cash value in your plan can grow to a substantial amount of over the years to become a substantial financial asset. Once you have this resource, it will not decline with the market. You get to use this value throughout your life, and it can become a critical component of your retirement plan.
Many families use the option of a whole life insurance policy to help them manage down periods in the stock market.
4. Some life insurance policies will pay dividends.
The cash value of a whole life insurance policy comes with a guarantee that it grows out a specific rate. This figure gets based on the assumptions that your provider makes about the value of the market and your overall health. If the company from whom you purchased a policy performs better than expected, then it may offer a dividend that helps to secure your future finances. You can then use those funds to pay your premiums, invest more into the policy, or take a cash payment.
Northwestern Mutual is a global leader in this particular advantage of life insurance. This insurance company has paid an annual dividend every year since 1872.
5. Tax advantages are possible with some forms of life insurance.
Although a term-life insurance policy doesn’t typically come with any tax benefits for individuals or families, a whole life product may offer some benefits in this area. The death benefit that you receive is usually tax-deferred, which means your family won’t need to pay any taxes on the dividends earned or the money distributed to them if something unexpected happens to you.
The IRS does require you to pay taxes on any earnings that you have if you surrender your policy for a profit. If you maintain your whole life plan, then the tax-deferred growth you experience allows your cash value to grow faster than in other potential investments. Some policies allow you to exchange your life insurance for another type of protection, such as an annuity, when it reaches a maturity date.
6. Life insurance gives you the peace of mind you need.
It is not unusual for people to think that their life insurance premiums are a waste of money because they don’t die while the policy remains in effect. Those payments weren’t for nothing. You are maintaining a policy as a form of protection so that in the event you die, which is something that could happen at any moment, then you are still providing for your family in the same way that you were helping them while alive.
Many people find that you cannot place a price on this particular advantage. It is a way for you to pay for your own final expenses, eliminate debt, and help your family stay in your home.
7. Applying for life insurance is simple to do today.
Several websites are available right now that can help you to compare different life insurance policies. It only takes about 10 minutes to secure free quotes from several carriers so that you can choose the best form of protection for your family’s needs. That means you can fill out your application in the privacy of your home instead of sitting through a sales pitch from a local agent. It is a no-pressure situation that lets you choose the exact coverage you need, although some people do find that they need some extra help in understanding the terms of a whole life policy.
8. There is flexibility built into the purchasing process.
You have the option to increase or decrease the benefits available to you with your life insurance policy over your life. Most people don’t need to have a significant payout as a death benefit after they retire because their home is no longer under a mortgage, there are no dependents that require care, and all outstanding loans are gone. That means the extra years spent paying for a life insurance premium can pay off when you structure it correctly to meet your needs.
The reality of human life is that everyone will die. It’s not a matter of if, but when. Insurance products like this become a financial planning tool that can help families move forward in these difficult situations.
9. You can typically borrow against the value of a policy.
Term-life insurance doesn’t provide you with this benefit in most situations, but you can receive it with a whole life policy. A portion of your payment is set aside in a savings account with some plans so that you have a funded retirement. This money gives you an opportunity to withdraw or borrow against it if you have an emergency situation to manage or a large expense. If you outlive the life of your policy, then you can receive cash back from this account.
Let’s say that something happens to you after you take money out of your life insurance policy. Your family will still receive a death benefit based on the amount listed in the terms and conditions, but it will be less the figure that you borrowed from the plan.
List of the Disadvantages of Life Insurance
1. Life insurance policies can be extremely complicated.
A term life insurance policy is usually fairly easy to understand. If you pay a specific premium each month, then you will receive a death benefit in return if something unexpected happens to you or a covered loved one. When you pursue a whole life insurance product, then there is a lot more for you to consider.
Depending on the policy and riders that you choose, there could be different rates of guaranteed cash value growth that are possible. How dividends get distributed, or if they are even available, varies by provider. All of the different rules can be confusing, but it can lead you toward a final product that meets very specific needs. It will take some time to decipher all of the rules that exist, so hiring a financial professional is usually necessary.
2. It can be an expensive investment for yourself and your family.
A term policy is usually an affordable life insurance product. Most people can receive a death benefit payout that equals five years of their current income for under $30 per month. It can be significantly lower than that rate in some situations. A whole life insurance policy is much more expensive.
Since a whole life policy builds cash value and doesn’t expire, the monthly premiums can be significantly higher. Most people purchase a mixture of these two products to ensure that there are enough benefits to protect their families and fund their retirement.
3. Your health can dictate the affordability of life insurance.
Life insurance is like any other financial product. When there is less risk involved to the provider, then the cost to the consumer is going to be lower. That’s why the cheapest policies typically go to the individuals who are young and healthy. Most premiums get determined by an individual’s medical profile, including their family medical history and age. If you are sick, and the potential exists that you could die prematurely, then a higher cost gets assigned to your policy to hedge against that potential outcome.
If you purchase a $500,000 life insurance policy today, then the cost is going to be about $20 less per month if you are in your 20s compared to when you are in your 40s. Having weight issues or chronic health concerns can push that figure even higher.
4. The rate of return on the cash-value component is often low.
If you struggle to save money consistently, then the cash-value component of a life insurance policy is a fantastic way to create a vehicle for your retirement. That’s because you’re also getting the coverage needed in the event that something happens. Unless you’re willing to invest a significant amount for a high-quality plan with favorable rates, the return that you receive from a policy is going to be less than what an IRA, 401(k), or another tax-advantaged plan can provide.
5. It can be easy to be misled if you don’t review policy stipulations.
The world of life insurance is complex and confusing. Some salespeople don’t even know the full scope of the products that they sell because of the various terms and conditions that exist in some of the policies. Pursuing anything other than term-life insurance coverage creates a “buyer beware” situation to manage. There is more than one story out there about someone buying a policy from a less-than-ethical agent regarding more coverage or fewer needs than what is necessary.
6. A policy surrender with life insurance takes years to recoup the value.
One of the advantages of whole life insurance is that you have a cash surrender value available. The only problem with this opportunity is that it takes several years before you can see any value at all. Many policies require you to make the monthly payments for 36 to 60 months before you can surrender it for anything at all. Then it can take another decade before you’ll finally get to a break-even point with this investment.
It is not unusual for a policy owner to fail to recover the total amount of premiums paid when surrendering their life insurance policy. If you have any doubt as to the length of time you can support this investment, then an alternative solution is going be a better answer to your future money needs.
7. You may not have any control over the investments made by the life insurance company.
Most policy owners have very little control over the investment decisions made by their life insurance company. This financial option is not like an IRA or a 401(k) plan where you can choose where to invest your cash. Then the fees that get taken out of the premiums are typically very high, further reducing the short-term value that you receive with this investment.
The fees that come from whole life insurance investments can exceed 3% at times. Most investors prefer to keep this expense to less than 0.5%. You’ll want to make sure that you understand any fee structures before you get started with this option.
Life insurance might not be a necessity for families with higher income levels, but it still provides a useful benefit to protect against the unexpected. Losing your paycheck could be a devastating event for your family. Knowing that a tax-free cash payment is coming their way won’t replace you, but it will replace your income for a while.
Although the acquisition process can sometimes be lengthy and annoying, having the help of a trusted financial advisor can take you through the necessary steps to get the result you want. Then you can pursue a term-life, whole life, or another form of financial protection to plan for your retirement and secure your wealth against the unexpected.
The advantages and disadvantages of life insurance must be individually considered to ensure the best possible outcome occurs. It isn’t a decision to be rushed, so invest some time into this process to ensure you and your family’s financial future receives the protection it deserves.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.