Life Insurance Policies Are Not Simple Choices
A life insurance policy protects your survivors from financial uncertainty after your demise
. It is a good safety device to have. But, with the number of life insurance policies available in the market, it is not easy to make the optimal choice.
The 2 main types are the term and the permanent life insurance categories. If death benefit protection is your primary concern, a term policy provides one at less cost than others. This life insurance is bought for a period of time, which can be renewed at a fixed or unfixed premium. There is no accrued cash value this type of insurance. Premiums can increase over time; but, with a level term the policy would lock in the premium for the period. A declining balance term policy can be used as a mortgage insurance with amortization matching the mortgage principal. After mortgage is paid in full, the policy expires. Term insurance may be convertible to permanent insurance. If you prefer this option, you may want to consider one convertible without requirement of a medical exam.
With permanent life insurance there is cover for the life of the person and this will build cash value. The insured will have access to the cash value during the policy period. The holder of the policy can borrow against it or withdraw part of the cash value without losing the death benefit, which the insurance company will pay to the named beneficiary upon the death of the insured. Premiums are usually higher than they are for term insurance as cash value is built up in this policy. If provision of benefits to your survivors is your primary goal, choose permanent insurance. Whole life insurance, variable life insurance and universal life insurance are broad categories of types of insurance within the permanent insurance category.
A whole life insurance offers permanent protection with savings. The premium rate will be fixed so long as premiums are paid on time. A part of the premium accumulates as cash value according to a schedule. If there a loan is made or a withdrawal, future values will change and the deductions will decrease the cash value and the death benefit.
Universal life insurance is similar to whole except there is a potential for higher earnings on its savings component. Such policies can be flexible with regard to premium and value. There can be options to alter the values. They typically offer a guaranteed interest rate earned on the cash value. This interest rate is linked to stock market performance, but this will not fall below a guaranteed minimum rate. Its drawbacks include higher fees and some interest rate sensitivity. Premiums can increase when interest rates decline.
With variable life insurance the cash value can be invested with choice amongst the investment options. The value will rise or decline based on investment performance. Volatility in the stock market can result in premium changes. The ability to afford the premium changes should be factored in to the decision of whether this type of insurance is suitable. Failure to afford the premium payments means lapse in payment. The universal variable life insurance has the biggest risk and reward profile in this policy variation type.
Consideration of the type of policy means taking into account the costs, the risks and the possible restrictions on when the money can be taken out, how much can the amount be. The potential risks and rewards should be weighed carefully. Variable life insurance fees and charges include cost of insurance varying with characteristics such as age, gender, health, the underlying fund charges and expenses, and additional charges for customizing a policy to fit individual needs. Be aware that loans, withdrawals, and surrenders, whether partial or whole, can adversely impact the death benefit. These may also have adverse tax consequences and result in lapsing of the policy. Questions about fees and charges associated with policies should be asked and answered to your satisfaction. Be sure about how the calculation is done and what it applies to. With any changes in personal situations, there will be changes in insurance needs. The product selected should be suitable for your long-term needs.
by: Rodney Daniel Bolton.
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