Life insurance is one of the best yet the most misunderstood and overlooked investments. It will assure your designated benefits a hefty financial support or sum in case you permanently lose your income generating capacity either through accident or death. Some insurance also covers health benefits wherein the insurer covers a certain portion of hospital bills or replace your income during the time when you were ill. The nature of life insurance has evolved significantly over the years and most policies now have features that could give you more than your money’s worth.
People in general are in the dilemma of picking the right and best policy for them. They don’t know what kind of policy fits them right in accordance to their status. Some people end up getting insurance that they really don’t need thus they end up spending more or not getting what they really need. Insurance policies are tailor made to fit different kinds of needs and at the same time, protect the company’s interests. Getting a life insurance policy puts both the insurer and policy holder in some financial risk. If something happens to the policy holder, the insurer will spend more to cover the financial needs while if nothing happens to the policy holder, such person will end up paying more and the value of the insurance will get less.
Knowing what kind of insurance do you need will spare you from the mistakes that most people make. Life insurance basically falls under two categories: Term Insurance and Whole Life Insurance. Term insurance has a limited coverage normally in 5, 10, or 20 years for a specified premium. In general, term insurance is said to be “pure” insurance because all it does is to provide financial support to the beneficiaries in case of the death of the policy holder. However, several term insurances carry investment features with them which provides the policy holder a cash value in case the policy wasn’t used during the time the policy was enforced. Whole life insurance on the other hand, as the name suggests, provides insurance for the duration of the policy holder’s life. Popularly called as Permanent Life insurance, it is a policy that will remain enforced until the policy is paid out. Unlike term insurance, whole life insurance has investment benefits for the policy holder or in other words, the policy holder can receive a cash value as soon as the policy has been paid out or matured.
Both term and whole life insurance has their own advantages and risks. Because term insurance only covers a specific period of time, its premium normally cost less than whole life insurance. Term insurance is ideal for people especially bread winners who are starting out to build their financial nest. The new concept called Buy Term and Invest the Difference (BTID) is term insurance with bundled investment normally placed in mutual funds. The main advantage of BTID is that the insurance and investment are separate entities. If you use your insurance, your investment remain and vice versa. The difference between BTID and whole life insurance is that in whole life once you have used either of the insurance or investment, it cancels out the other. Another benefit of BTID is the shorter period for paying the premium. The reason behind this it that the investment portion of your policy will take care in paying for the premium of the insurance. For a 20-year plan, premiums are normally just payable in 5 years in BTID.
Whole life insurance provides lifetime coverage to the policy holder. It remains enforced even after 20 years since the first premium was paid and will remain enforced until the policy holder’s death providing the beneficiaries a good amount of sum. Policy holders also has the option to pull out the insurance in the form of investment whenever they wish as long as the policy has matured already. However, the insurer face the risk of paying more than what is needed if the policy isn’t used. Since whole life remains enforced for the duration of the policy holder’s life, there are some cases where the policy holder pays the premium every year and might come to a point where what was paid is more than the face value of the policy. Some whole life policies have limited pay features which gives the policy holder an option to pay the premium in 5, 10, or 20 years normally.
Experts and financial planners suggest term insurance over whole life insurance because you will not need insurance for the rest of your life. Term insurance is ideal for people who are starting out such as breadwinners of new families, new businessmen, and new investors. If you happen to be one of these people, consider term insurance. You will soon come to a point in your life where you have invested and accumulated a good amount of cash that will support your needs. Whole life insurance is ideal for people with big families or haven’t established a good financial foundation. Social security and retirement pensions have become less because of inflation and the support that whole life insurance will be significant enough for your beneficiaries.
Assess your finances and needs, talk to a number of brokers or agents, do some research, and reflect on what you really need. It will make you get the most out from your money and picking the right kind of insurance is crucial for you and your loved ones.