What are the advantages/disadvantages of Life Insurance?

Just in general, what are the pro's and con's of investing in Life Insurance

Depends on your circumstances and your age/financial situation. I don't have life insurance, but I have a decent IRA. If I die, (since I am a breadwinner but not the primary breadwinner) my husband gets my IRA which will MORE than cover my death, expenses, etc.

Now my husband who is the primary breadwinner DOES have both a 401K(TSP)-- (IRA) and sizeable life insurance.

If you're young and don't have any bills/ or people who will be adversely impacted (financially) by your death, I would say just have a will & some money to cover your funeral. Instead, start putting money in a retirement plan while you're young.

Once you get married & you are the primary breadwinner, you should look into Life insurance as well.

I think you might like to understand some of the basics of life insurance before you make any decision. (I'm presuming that you're in the U.S.)

First: Congratulations on even looking at the situation. A lot of folks don't until it's way too late.

Second: Let's discuss some various types of life insurance. Here are the basic forms of insurance.

First: term - this is for a specific period only. Most companies offer 10, 15, 20, some 30 and even 40 year term policies. There is no cash value accumulation within a term policy and it is basically renting your insurance for a specified period of time. It has its place, but the one bad feature of it is that you only win if you die. Most beneficiaries actually appreciate if the policy is in force at your death :-) and only about 1-2% of all term policies ever pay off because most folks drop it as they get older, simply because the costs become exhorbitant.

The idea for many is to buy the insurance cheaply and use what difference there would be between the term policy and what you would pay for a permanent policy and put that into a mutual fund. That may or may not be a good idea depending on your situation, and you might have to be concerned with tax consequences if it's a naked mutual fund (not covered within a ROTH IRA, for example.) Not everyone is eligible to use some of the "wraps". Unfortunately, a lot of folks also buy the term and do NOT invest the difference, but use it to buy "toys".

Second: there is permanent insurance. This is insurance that will cover you for your lifetime, no matter how long. There are various types of permanent insurance. A lot of folks only know of an older one called Whole Life. This is an insurance in which there is cash value growth within the policy. The premiums are fixed in this type of policy. The basic idea is that you make premium payments and what is above the necessary to insure you goes into the General Accounts of the insurance company and they usually guarantee you about 3-5% on this. However there is almost never any cash accumulation over the first five years and what they give you barely, if it even does, keeps up with inflation. Also as you age, the cash accumulation can be used by the company to pay for policy charges so these often lapse or the person winds up at retirement with little if anything in the policy.

There was another insurance called Universal Life which is similar in many ways to the whole life, but here the premium payments are flexible, but again any cash value accumulation is put into the General Accounts of the insurance company and guaranteed at about 2-5%.

Third:
Because both of these types of insurance didn't provide real cash value accumulation (and because back in the 1970's A L. Williams was creaming the insurance companies with "buy term - invest the difference", the insurance companies came out with a fantastic product, and it is a very very good one for a lot of folks. It's called a Variable Universal Life policy. Here, the cash value accumulates in Sub Accounts (which are owned by the insured and NOT the insurance company). These accounts are out in the market and get market rates of return. Depending on the portfolios that you are in, these can average anywhere from 8 - 12% over time.

These policies not only provide life long insurance for you, but the cash value in the account may be accessed tax free (as it may in the other cash value insurance) and if structured correctly, this can add much money to your retirement or even before so you and your partner may enjoy it even while you're alive (as well as having the death benefit if something happens to you).

About eight years or so ago, the insurance companies also created Equity Indexed Universal Life. In these policies, the cash value accumulation is a result of being compared to some index, usually the S& P 500 over the year. A lot of these policies average about 8% over time. They often usually have a cap and a floor and they are often very attractive to folks who like guarantees and who may be a bit older.

You're going to hear a lot of "sound bites" here. A lot of simply "buy term, invest the difference". "All cash value insurance is evil" etc. These are usually from folks who aren't even licensed to discuss the variable forms of insurance in front of someone.

I'm dually licensed, both with an insurance license as well as a security license (no, this is not a solicitation for business, I'm simply attempting to answer your question in as concise and correct as possible in front of a computer where I can't illustrate or draw things for you.)

I suggest that you might like to have your library request "The New Life Insurance Investment Advisor: Achieving Financial Security for You" by Ben Baldwin. It's a bit dry, but you can see for yourself that what I've said is accurate.

Please, if you speak to any agent local to you, make sure he/she is dually licensed so you can get the full story and not just the part of it that the singly licensed person wants to babble because it's the only way they can sell the only thing they have available.

Does this mean I think term is bad? Absolutely not. I often recommend it to folks who have a need for it, but usually it's a convertible policy that can be moved to a permanent one as their situation improves. However, term is NOT the be-all and end-all and it often increases in cost to a point where you can no longer afford it as you age. Also, say you're in a 20 year term, what happens if at age 45 you are suddenly diagnosed with cancer, or have a heart attack, etc. Your chances of having your policy renewed at age 46 again have dropped to about zero. If you died then at age 47 your loved ones would get nothing since no policy would be in force.

Now having said all of that, remember the basic reason for insurance IS insurance. Life insurance is to make your family "whole" again after your death and to replace your income to them. Structured correctly and with a knowledgeable agent who can correctly help you to assess your own situation, it can also help to provide you with a "living" benefit as well as its main benefit on your death.

Pro: If an unfortunate accident befalls you, and you are present no longer, your family don't have to suffer heavy financial burden. The insurance money will help them, at least pay off a big part of home mortgage for e.g.

Con: You could just say that you're paying a month premium. So it would reduce your money for monthly budget. This is not really a con, but may appear so at first. But, realize,taking a life insurance is one of the best presents that you can give to your family. Of course, if there is no family or any relations to you, then who are you leaving your money for. There is no need to have life insurance then. (no offense intended)

The amount for which you can get a life insurance will be based on your ability to pay your monthy payments, the insurance company will decide an amount based on your salary, so it's not a burden.

It depends on the type of life assurance you take and the reasons for wanting cover. For example: if you have a mortgage with a partner or family and they would be unable to keep up the repayments on your death, it is imperative to have life assurance or your family could be left without a roof over their head. You could take a cheap form of cover for this which in the UK is called Term Assurance and has no cash in value as it is pure insurance. This means there is no investment just a monthly premium that pays out in the event of death.
However, there are also other forms of life cover that include an investment element. Under these types, you need review where the money is invested and be comfortable with the risk to your investment.
You would be best to go to a reputable independent financial adviser to discuss your personal needs and they should explain all the pros and cons with you. If you are based int he UK feel free to contact me and we can do a free consultation via email or phone.

i feel their are only advantages in life insaurance

The advantages are tax-deferred growth of cash value and potential tax-free income. Using life insurance as an investing tool is definitely not for most people. Here's an article about the down side....

EDIT: @ huskerred, your argument is so eloquent you won me over (sarcasm). Try reading the article. It actually supports your viewpoint.

I have to keep this quick or I could talk about it all night. First of all Life Insurance should NOT, I repeat NOT be an investment. Lots of agents will try to sell it to you as an investment! Not even legal to talk about Life Insurance as an investment! Purchase Term Insurance ONLY, that is guarnteed LEVEL for at least 30 years. Make sure it will not go up at ANY time during your policy period. BUT DO NOT INVEST IN AN INSURANCE POLICY! If that's Whole Life, Universal Life, Variable Universal, etc... Do not do it! It's so costly for them to overcharge you for insurance and put very little into your investments. It's not like they have some "super charged" funds. Buy Term Insurance it's pure protection, works just like auto, home,etc. in the event of _____ they pay. Your auto or home insurance has no cash values, why would your Life Insurance? If you die and have a Whole Life Insurance policy, your cash values that YOU put into that policy WILL, I repeat WILL revert back to the insurance co. NOT your family. If you have 250,000 for your Death Benefit, and 30,000 in cash... that's right your family gets 250,000. Where does the 30K go again? That's right to the INSURANCE Co! Who put that money into that acct? YOU DID!!!!!!!!!!!!!!!!!!!!!!!!!!! If you buy Term, invest the difference in an account that is owned by YOU, your FAMILY gets the cash if you die! Your family is way more important than your insurance co!

that aaron guy is a fruit cake he dont no squwat. cash value will never b a placwe to investmoney poor advice from a twit. buy term invest the difference of the premium and be greatful in about 40 yrs. that u did it. by

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.024
Copyright (c) 2011 Financial Crisis Sunday, May 27, 2012 - Terms of use - Privacy Policy