The most significant advantage is obviously the death benefit paid to your family. It makes sure you can carry out your responsibilities even when you are no more there. It makes sure that your loved ones who are already dealing with an emotional loss do not have to deal with financial loss also. No doubt it is a boon. But every positive brings with it its negatives. Likewise, there are advantages and disadvantages of life insurance.
In this article, we will discuss all the advantages and disadvantages of life insurance. We will also discuss how to maximize the benefit of your policy. So, let’s begin without much ado.
Advantages Of Life Insurance
There are both advantages and disadvantages of life insurance, but let’s first see the benefits:
#1: Life Insurance provides you much-needed peace of mind
Many of us have home loans and car loans whose we need to pay EMIs of. And many of us fear taking such huge loans due to the uncertainty of life. We worry about who will pay off the EMIs of the loans after us. And our worries are genuine. It can put our families under much financial strain.
And not only these loans, but also many other expenses from your child’s college fees to putting food on the table are there. And do not forget the end-of-life expenses. The expense list is longer than you may imagine. Life insurance provides a much-needed cushion to your family when they are already in grief.
Also read: What Does Term Life Insurance Cover?[Complete Guide]
Life insurance lightens your family’s burden from the financial angle and helps give them some time to start life once again. It also gives you some inner peace and your family some peace of mind. Life insurance can also make you more confident about taking a mortgage or buying a car. You know that these loans will not be a burden on the family after you.
#2: It is pocket-friendly
Many people believe that life insurance premiums are an expensive deal. But sincerely, that is a myth. In actuality, a life insurance policy is relatively cheap and within your budget and can be as cheap as $20 per month. Crazy right?
Life insurance premiums depend on many factors, from your age to health to policy type to term length and whatnot. For example, a woman in her 30s in good health will pay lesser than if she buys the same policy at 45. And it makes sense. She might be having some medical conditions like Blood Pressure or Diabetes, etc., by then. These conditions increase the risk for the insurance company, and hence they charge a higher premium.
But even then, there are ways to lower your premiums. First of all, try buying your policy online. It is cheaper that way. Also, shop around to find a lower premium. Some insurance companies provide a lesser premium for Diabetes and some for Blood Pressure. Thus, keep looking till you get a good deal.
Life insurance policies may feel like a burden when you are young, but you will realize their worth as the time goes by. Indeed they are significant financial security.
#3: Easy to get
Another myth about life insurance is that the process is complicated. There are agents, paperwork, medical exam, etc. But that is not true. For most people, the whole process can be completed in a single day and online.
Many insurance companies offer an online application facility. Everything from searching for an excellent policy to obtaining it and starting the coverage can be done online and that too quickly.
Many websites let you compare various policies and help you choose the best one. Once you have found your ideal policy, you can buy it and fill the application form online. After filling the application form, the insurance company will inform you if you are eligible for coverage. If found suitable, coverage starts the same day. Most people do not need a medical exam as well. The insurance guys study your application and many times wave off the medical exam.
Thus, life insurance is easy to get and not a hassle.
#4: The tax exemption advantage
Another significant advantage of having life insurance is that the death benefits and cash value growth are tax exempt.
The death benefit is usually a significant amount. And thus, taxes could have taken a lot away. But since the death benefit is tax-exempt, you can rest assured that all of it will directly go to your family. There is less complication—no need to study tax laws and no need to use calculators and accountants.
This exemption also means that it is an excellent instrument for financial planning. If you plan correctly, you can use the death benefit as crucial financial security for your loved ones. Other methods will be taxable, while a death benefit will never be so.
Cash value growth is also tax-exempt. Thus, if by any chance you need to withdraw it while you are alive, you will not need to pay any taxes on it. Nor would you have to pay any taxes when you ultimately get it back.
#5: It can be a great financial plan
All of us worry about financial security after retirement. And thus, all of us prepare for it by diversifying our investment plans. And life insurance should be a part of that investment portfolio.
Why? Because most of that portfolio consists of retirement plans and 401(k) plans and the types. But if something happens to you before that, these plans will not be of much use to your family. Then they would need immediate help. And life insurance can provide them with that.
Think of life insurance as a bridge. If something happens to you, then your family has financial security. And if you reach your retirement, use the cash value of life insurance and live gala days.
#6: Cash Value Life Insurance can be a savings plan too
A few types of life insurance policies come with a cash value component too. The traditional term life insurance has only a death benefit and no savings component. But other types like whole life insurance has both of them. That is, if you die, your family receives the payout, and if not, then you can withdraw the savings component and lead a good life. This withdrawal is just like you would withdraw from a traditional retirement plan account.
This strategy is also called Life Insurance Retirement Plan (LIRP).
While we agree, this is not for everybody. Whole Life Insurance with a cash component can be a high premium investment. But it can be a good idea if you are a high net worth individual or somebody who has maxed their 401(k) and Roth IRA options. Although you are paying quite an amount, whole life insurance is another level of security. After all, peace of mind and financial security are invaluable.
Disadvantages Of Life Insurance
Nothing is perfect. Until now, you must be thinking having life insurance is a must. But hang on, it is as open to flaws as anything else. It is a contract and thus has its shortcomings. Let’s see where the life insurance policies lack so that before entering into a contract, you know what you are signing for.
#1: It costs you money
Obviously, the most important reason is that it takes money and more so if you are old or unhealthy. Taking a policy is costlier if you are older. Say, if you take a policy in your 20s, you will pay far fewer premiums than when you will pay if you take it up in the 40s.
Life insurance is cheaper than most people’s assumptions. Still, people who need it the most, like those in their 50s and with pre-existing conditions, have to shell out a considerable amount. It is sad, but since the insurance company has a higher risk, they charge a higher premium.
#2: Whole Life Insurance is an expensive deal
Whole life insurance is an expensive deal whenever you buy it. It costs 6x-10x more than term life insurance. Thus, where term insurance can be purchased for $30, whole life insurance generally is in hundreds of dollars. And definitely, that is a considerable amount of money for most people.
According to a survey conducted by The Society of Actuaries, a solid 45% of people who buy whole LI abandon the policy within ten years. This is indeed an alarming fact.
Whole LI is definitely an investment because it will surely payout. But do you really need that much coverage once you retire? Like a mortgage, other loans, and kids’ college, most of your obligations are all done. There are not many people that will be dependent on you then.
Thus, many times it is not worth buying a Whole Life Insurance policy.
#3: Not much worthy as an investment option
We are not contesting the worthiness of term insurance at this point, but that of whole life insurance.
The cash value of whole life insurance is tax-exempt but grows at a very low rate. Instead, your money will grow at a much faster pace with other instruments like 401(k) and IRA, etc.
Thus, an excellent way to get about your financial plan is buying term insurance and investing in other programs like 401(k). Once you max out your limit in 401(k) and IRA, etc., you can consider buying whole life insurance. But before that, it might not yield much profit.
Another disadvantage is that even whole life insurance policies can be risky, just like other instruments. So read the fine print before you invest in anything.
Also read: A guide to what pet insurance covers and what not?
Lastly, there is a clause, when you redeem your cash, you need to pay some fee. This act is also called surrendering the policy and marks another flaw in the whole life insurance policy.
#4: Buying life insurance needs research
Buying life insurance can be tricky. If you do not know about the types of policies and the advantages and disadvantages of life insurance, an agent can mislead you. There is much fine print involved in the policies.
Like can smoking in the past affect premiums, whether your company offers lower premiums for Diabetes or Blood Pressure, etc.
You should also know which policy type will suit your needs. But once you have gathered all the information, chalk out a budget, and buy a policy. If you research nicely, finding a policy that suits your needs and pocket both will not be difficult.
How To Get The Most Benefit From Your Policy?
After learning about the advantages and disadvantages of life insurance, here are a few ways that can help you get the most benefit from your policy:
#1: Start early
We can’t emphasize this enough. You can save hundreds of bucks by signing for a policy early. The ideal age to get life insurance is during your 20s. Premiums tend to be lower when you are younger and healthier.
#2: Be truthful with your application
This is again a must-know fact. There is a clause named life insurance contestability period.
Also read: How To Claim Life Insurance In Case Of Death? [Ultimate Guide]
Under this clause, if you die within two years of starting the coverage, the company can investigate your application. And if they find any discrepancy or something that you did not mention, they can deny your family the death benefit.
So, this was all in our guide about the advantages and disadvantages of life insurance. Concluding, we will say that life insurance is an excellent tool for securing your family’s future. But one should be careful and read all the fine print correctly.
Also, assess your requirements diligently and buy coverage only for that and invest the rest. This way, you can have the best of both the worlds. Whether you live or not, your family is secure anyway.
We hope you liked the article and that it was informative. However, we have tried to explain things thoroughly if you have some questions buzzing you. Please drop them down in the comments section. We will be glad to answer.