The age old question of which type of life insurance product is best can be summed up in these few words…the one that is enforce at the time of death. Not trying to be a smarty pants but that is a very true statement. The purpose of a life insurance policy is to provide large amounts of money at the death of someone for a small investment of premiums over time. While life insurance cannot replace the love, comfort or companionship of the fallen father/mother, husband/wife, or child… it can help provide the financial bridge for the family and their future.
EXAMPLE: 30yr old male with family has a $500,000 dollar policy paying $25/mth* and dies from a car accident, heart attack, etc. The beneficiary of the policy would get the $500,000 dollars benefit on a tax free basis upon the death of the insured person. That doesn’t matter if the person had paid only one premium of $25 dollars or had been paying for years (depending on contract). Upon his death, the benefit is paid out if the policy was kept in good standing, (premiums paid on time). So as you can see, even if the family man had been paying on his policy for 10yrs before his death, he would have paid out $3000 dollars in premiums and his family would be getting $500,000 dollars in benefit.
TERMS: There are many variations of life insurance in the industry today but they all boil back down to two main types: Term and Permanent insurance. The names basically identify for you the purpose behind both:
a) Term insurance is created and purchased to cover a specific term of time, i.e. 5yr, 10yr, 20yr, 30yr; typically most term plans stop at age 80. I mention this as many people are living past that age for years and would have no coverage after that time. It is “pure protection” it pays out the benefit IF you die during the policy term. If it ends and you are still alive, then there is typically no other benefit to be had from a term policy. The main “benefit” of term insurance is the low cost for coverage. Cost of a policy has several factors such as: age, sex, health, benefit amount and length of contract- 5yrs or 30yrs? The longer the contract, the greater risk of you dying while the contract is in force and the benefit being paid; so the greater the cost to you in premiums.
b) Permanent insurance was created to cover those things that are of the permanent nature…you will eventually die and will need to have the funeral cost covered. It may happen at age 10, 30, 50, 70 or 90, but it will happen. I am sure everyone has heard about a family having to borrow money to pay for a relatives funeral expenses because they didn’t have life insurance? It is such a small provision in the early years that everyone should take care of their own future needs and not leave it behind for the surviving family to handle. Permanent insurance is priced with the knowledge that they will be paying out the death benefit. The permanent policy has several other advantages over the term policy. One is- you build up tax deferred monies that can be used at a later date for various events. These monies can be retrieved through various means such as withdrawals and/or loans. The permanent policy also has the advantage of acquiring enough cash value in the policy so that the insured can allow the policy to be self sufficient, not have to pay any additional premiums out of pocket but allow the policy to pay for itself. Many refer to this as a “paid up policy”, but in policies with most companies- that type statement would not be exactly correct, even though as stated earlier, the policy has reached a point where it pays for itself. It is a great benefit for one to have a “self sufficient policy” when they retire. The future funeral expenses are provided for, but no additional out of pocket expenses are needed during this time when their income has reduced due to their retirement.
There are many nuances to the different policies, serving many different needs…whether for personal family or business needs. Life insurance has an advantage over investments because of the life insurance’s ability to pay out large sums of money even though the insured may have only paid in one premium when death occurred? The life insurance policy is a greater guarantee of needed future monies than a savings account or any other investment because its payout is not dependent on the stock market or any other market; it is a contract that you can count on as long as you keep it in good standing on your end.