There are life insurance policies that benefit you in two ways: they
pay in the event of death and they allow you to accrue tax-deferred
savings. It can be a bonus if you are in need of insurance anyway, but
you shouldn't buy an insurance policy as a way to save money. There are
better, more economic ways to save.
The most common form of life
insurance is term insurance. It doesn't build savings; instead, you are
basically renting a policy. You pay a fixed premium for a preset amount
of years, like five, 10 or 20 years. Your premium remains the same each
year. If you die during the period, the insurance pays you the amount
of life insurance that has been promised. Once the term is up, the
coverage ends. All promises between you and the company are cancelled.
If you outlive the coverage or if you cancel the policy, you will not
receive any benefits. This is simply a death benefit, not any form of
savings.
Permanent insurance policies cover you for life and
offer a tax-deferred savings opportunity for as long as you pay the
premiums. There are primarily three variations of permanent insurance:
life, universal life and variable life.
Permanent life insurance
provides you with an opportunity to build cash value in addition to the
death benefit. The face value of the policy is the amount of money that
is paid at death or policy maturity. Most permanent policies will
mature when you reach 100 years of age. The cash value amount is
available to you if you die or surrender a policy before its maturity.
The
cash value of your policy will grow until tax-deferred until you
withdraw it. You are able to borrow against the cash value of your
policy, but if you don't repay it your beneficiaries will receive
reduced benefits. In order to build cash value, you will have to pay
higher premiums. These policies are much more expensive than term
insurance.
According to the Life and Health Insurance Foundation
for Education (LIFE), whole life policies provide you with a guaranteed
death benefit, plus a guaranteed rate of return on your cash value.
Your set premium is guaranteed to never increase.
With a
universal life policy, your insurer separates your death benefit from
the investment portion of your premium. The investment dollars are
placed into bonds, mortgages and money market accounts. Your investment
fund will pay for the cost of your set death benefit. Even if your
investments do poorly, you will be guaranteed a minimum death benefit.
If you do well, your beneficiaries receive more money.
A variable
policy has death benefits and cash values that vary based on the
performance of underlying investments. You assume a greater risk by
trying to achieve greater returns.
There are instances where
permanent life insurance is a better fit than term insurance for a
family. If you have a disabled dependent that will need long-term care,
a permanent life insurance policy might be your best choice. Most
parents only insure themselves for as long as they have children and
school and are working outside the home. In your situation, you may
want to insure yourself for your entire life.
Permanent life
policies can be hard to understand. Be sure that you understand all for
the terms before you buy a policy. Most advisors say that you shouldn't
use these policies for saving for retirement or a college education.
There are better options through a 529 plan, prepaid tuition plan,
Coverdell Plan, a 401(k) or an IRA. In these plans, you do not have to
pay for an insurance premium to build your money.
Martin Lukac (http://www.MartinLukac.com), represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com,
a finance web-company specializing in real estate/mortgage market. We
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