I read a MarketWatch article by Clark D. Randall. I decided to share some very basic life insurance concepts from their article in this blog post.1
Life insurance can be very complex. However, their article doesn't go into all the intricacies of life insurance policies, nor am I going to, in this blog post. Their concepts cover just enough to help decide if life insurance should be used as an investment or only as a death benefit.
Two essential components of life insurance are: the death benefit (what the beneficiary receives when the insured dies) and the premium (what you pay).
Term Life insurance is basic life insurance that pays a death benefit to the beneficiaries if the insured dies during the specified term of the life insurance policy. Term life insurance does not have a cash component built into the policy, as most permanent life insurance policies do. Term insurance is many times referred to temporary life insurance, since it only covers the insured for a limited number of years that is determined in advance, before the policy is effective. Therefore premiums are much less expensive than permanent insurance since the insured is only covered for a limited amount of years listed in the policy and there isn’t a cash value component built in.
Note: Keep in mind that a life insurance policy payout can create a TAX FREE instant estate to the beneficiaries to help protect them financially after the insured passes away.
Permanent Life Insurance generally has cash value built into the policy and can come in many varieties such as whole life, universal life, indexed life, variable life, adjustable life, or a combination of those types. With permanent insurance you will pay a higher premium than term insurance and the difference is essentially deposited into some underlying investment component. Each year the straight cost to insure your life plus other policy charges are deducted from the cash accumulation and the balance grows inside of the policy on a tax-deferred basis. In addition, keep in mind with permanent insurance you are generally covered for your entire life, not just a specified number years like with term life insurance. That is another reason the permanent life insurance premiums are higher, since the insurance companies know that eventually they will have to pay out the death benefit. Unlike term insurance which may never have to pay a death benefit claim, if the original term lapses and policy owner opts not to pay the skyrocketed premiums yearly after the original term ends.
Another benefit of permanent life insurance is that the cash value policies have several choices to get money back out of their policy. Money can be borrowed as a loan and that amount would be tax free as long as they keep paying the premiums so the policy doesn’t lapse. They could take "tax free" withdraws, as long the total amount doesn’t exceed the total premiums paid in over the years. Or they could stop paying premiums and have the premiums deducted from the cash value.
To read the entire MarketWatch article, click the web link below:
https://www.marketwatch.com/story/is-life-insurance-a-good-investment-2019-02-11
1. Source: MarketWatch article by Clark D. Randall
https://www.marketwatch.com/story/is-life-insurance-a-good-investment-2019-02-11
Life Insurance information can be confusing to many people. As an "independent licensed agent" I can explain things to you in simple terms so you feel comfortable making a decision. Then I can help you choose a life insurance policy, from many choices of different insurance companies, that you feel fits your needs. Plus if you choose to work with me you will have personalized service by a local agent that can shop premium quotes for you. If you would like my assistance to discuss and/or start the process of getting you insured please call me at 941-404-5334.