Life insurance policies can benefit you in two ways. They pay in the event you die and allow you to accumulate tax-deferred savings. Although it can be beneficial if you have a need for insurance, you should not buy insurance policies to save money. There are more economical ways to save money.
Term insurance is the most popular type of life insurance. It does not build savings, but instead you rent a policy. A fixed premium is paid for a set number of years. For example, five, ten, or twenty years. The premium you pay each year remains the same. The insurance will pay you the full amount promised if you die within the term. The coverage ends once the term expires. All promises made between you and your company are void. You will not be eligible for any benefits if the policy is canceled or you live beyond the expiration date. This is a death benefit and not a form of savings.
Permanent insurance policies provide coverage for your entire life. They also offer tax-deferred savings opportunities for as long you pay the premiums. There are three main types of permanent insurance: universal life, variable life, and life.
Permanent life insurance gives you the opportunity to increase your cash value and receive a death benefit. The policy’s face value is the amount that is paid upon death or policy maturity. Most permanent policies mature at 100 years old. If you die before the policy matures, you can access the cash value amount.
Your policy’s cash value will increase until it is tax-deferred or you decide to withdraw it. Although you can borrow against the cash value, your beneficiaries will not be able to repay it. You will need to pay higher premiums in order to increase cash value. These policies are more expensive than traditional term insurance.
Whole life policies, according to the Life and Health Insurance Foundation for Education (“LIFE”), provide you with a guaranteed amount of cash value and a guaranteed death benefit. Your premium will not increase.
Your insurer will separate your death benefit and the investment portion of your universal life policy. The investment dollars go into bonds, mortgages, and money market accounts. Your set death benefit will be paid by your investment fund. Even if you invest poorly, you’ll still receive a minimum death benefit. If you do well, your beneficiaries receive more money.
Variable policies have death benefits and cash values which can vary depending on the performance of the underlying investments. By trying to earn higher returns, you take on more risk.
In certain cases, permanent life insurance can be more beneficial than family insurance. A permanent life insurance policy may be the best option if you have a dependent who is disabled and will require long-term care. Parents typically only insure their children for the time they are home with them. You may be able to insure your whole life, depending on your circumstances.
Understanding permanent life policies can be difficult. Before you purchase a policy, make sure you fully understand the terms. These policies should not be used to save for retirement or for college education, according to most advisors. You have better options with a 529 plan or prepaid tuition plan, Coverdell Plan and a 401(k), as well as an IRA. These plans don’t require you to pay an insurance premium in order to build your wealth.
