Pros and Cons of Common Types of Life Insurance
July 17th, 2010 | Author: weissheiss
It will help you greatly to make better decision if you understand most common types of life insurance policies in the market and their pros and cons.
There are two types of individual life insurance policies: Term and Permanent
Term Life:
As name suggests, term life covers specific time period, say Term 10 (10 years), Term 20 (20 years) etc, up to usually when you are 85 years old. You might see Term 100. It is actually a form of permanent insurance since it covers 100 years. Most of term insurance is guaranteed renewable and convertible to permanent policy during the coverage period without further medical proof.
Pro: The least expensive type of insurance during coverage period
Con: The premium will increase dramatically upon renewal after the coverage period;
There will be no coverage after 85 years old
The policy has no cash value
Suitability: it is the best choice if you need large amount of coverage with low cost for a specific period of time, such as personal debt which will be paid off in a certain period of time (mortgage), or financial support for children up to specific age, or your income before retirement at certain age
Permanent Life Insurance:
This type of insurance provides permanent protection. It includes Universal Life and Whole Life. In both policies, the premium consists of basic cost of insurance and over funding, which will be invested for future cash value. The return on the investment is tax sheltered.
Whole Life:
Pro: Provide permanent protection. No renewal or conversion required.
Premium guaranteed same throughout lifetime.
The cash value accumulated after years which can be taken out or borrowed against
Enjoy tax free compound growth on the investment
Option of paid up early
Con: The most expensive type of insurance due to high overfunding amount required
The payment amount is decided and the schedule is inflexible to change
The insurance company control the investment choices and returns
Suitability: Would be a good choice if you have substantial and stable monthly income, want to take advantage of tax shelter benefit, and don’t have time to manage the investment. The cash value can be used for retirement funding.
Universal Life – also considered as hybrid policy
Pro: Provide permanent protection. No renewal or conversion required
Options to decide deposit amount based on your financial situation
Flexible payment schedule
Options to choose and change investment vehicle
Options of paid up early or accumulate cash value
Enjoy tax free compound growth on the investment
Con: Certain level of investment knowledge is required to make investment decision
Suitability: Anyone who has permanent insurance needs and certain knowledge of investment. It is most popular among business owners. Can be used for business as funding for partnership agreement.
Before you start shopping for the suitable policies and rates, the most important thing is to know what you need and how much you can afford. To prepare the answers for some basic questions is highly recommended.
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