We have all had some form of insurance at one time in our lives. Most insurance is a voluntary undertaking, but there are instances where insurance is an obligation and cannot be avoided. One example is car insurance. Without coverage against accidents you can’t legally drive a vehicle on the roads. Another example are national health insurance schemes in which the contributions are taken out of employees’ salaries at source, along with tax. Usually, life insurance is a policy that is bought by individuals against possible unforeseen events. Although the idea of insurance in general is accepted as a prudent undertaking, many people also view it warily. They see disadvantages, not in the idea, but in how insurance companies use rules and clauses to deny or restrict pay-outs. There is also the argument of costs versus benefits.
The Advantages and Disadvantages of Life Insurance
- Financial Protection: The reason people take out life insurance policies, whether a set term or whole life insurance is protection against sudden calamities, such as bad heath or accidents. On the death or chronic illness of a principle wage earner, bills, mortgages and other financial expenses can be met.
- Minimise Worry: Peace of mind is probably the most common reason that people have for taking out life insurance. It certainly cuts down on stress, knowing that your family is covered financially in the event of your death. An insured person can rest easy knowing their dependents and loved ones are financially covered, in case of sudden death or debilitating illness.
- Cash Value: A long term life insurance policy may well be beneficial in cases where there hasn’t been any claims on the policy. When it matures, you can reap the benefit of a substantial cash pay-out. Not only is it financial coverage for your loved ones, but you can also look at it as a form of saving. People that have trouble putting money aside can use a life insurance policy as a way of being obligated to put money by because the contributions will paid by direct debit, which takes away the decision on whether or not to spend that money. Many policies actually accumulate cash value. In some cases, depending on the policy, you can borrow against the value of the policy.
- Tax Benefits: Some insurance policies can be charged against your yearly tax contributions. You may receive a refund or reduction in the revenue that you need to pay by including life insurance as a necessary expense. These are the basic investment pros and cons to consider when thinking about which policy would suit you. This depends on in which country you reside and the local, state or national tax regulations. It is a complicated subject that needs to be explained by the insurance carrier.
- Flexibility: Life insurance policies can be converted into different financial products, depending on your needs. Insurance companies now do their best to cover every eventuality that you may consider. Policies can be changed, renewed, extended or converted, depending on your changing circumstances. Modifications, called Riders, can be added or changed.
- Affordability: The days when only the higher bracket earners could afford to be adequately covered by life insurance is long gone. Nowadays there are financial products that are affordable for anyone who has a fixed income. Of course, the monthly payments depend on the ultimate value, if it isn’t claimed upon. Longer lifespans have lowered premium rates.
- Opportunity Costs: Probably the greatest disadvantage cited would be having to pay out the premium every month. Some people are reluctant to pay for something that they can’t see the immediate result from. Life insurance isn’t the same as paying for something physical that can be taken home and used while keeping up the monthly payments. Many people see it as a financial burden they don’t want, but the younger start, the cheaper your premiums will be.
- Limbo: This refers to people who dither and are undecided about the need for life insurance. They may consider the idea to be very good, but put off making a decision. Concerns over which policy and with which company to go with, may leave them in limbo, without taking action.
- Trust: Unfortunately, insurance companies aren’t seen in a good light. They are not altruistic entities and are run for profit. Limitations on due pay-out are always to be found. Anyone who has signed an insurance policy has noted the fine print, which always give rise to the feeling that among all that jargon are clauses to deliberately trip you up and deny what you believe is a rightful claim. There is also the fear of financial collapse of the insurance carrier, leaving the insured out of pocket and without the coverage that they paid for.
- Not Necessary: Some people just don’t like the idea of insurance at all. They believe they can earn or leave enough money to their relatives to cover any eventuality that arises. Whether they are careless or confident, they don’t believe in the necessity of insurance. Also, those without dependents don’t see the need of having life insurance.
- Confusing: Life insurance policies can seem to be very confusing. They are full of legal jargon that the average person has difficulty in following. Insurance agents may do their best to explain, but they also use the jargon. A sense of frustration and feeling of being misled may account for not entering into something you may not fully understand.
- Mortality: Policy amounts and premium payments are set by insurances companies using life tables that are based on annual mortality rates. Risk is calculated in general by health and age. Because of personal history or advanced age, you may be find yourself in one of the greater risk categories and the amounts payable for sufficient coverage may not seem worth it.
Term vs Whole Life Insurance
The difference between the two is simple at first glance. The basic difference is that term insurance refers to short term or a set number of years of coverage. The standard units are broken down into 5, 10, 20 or 30 years. These are flexible instruments that can even be purchased for 1,5, or even up to 25 years, designed to fit the client’s needs and circumstances. They are renewed annually and can be converted to whole life insurance. Less expensive than whole life, they are considered of greater value and can have added riders. Renewal of a mature policy may entail higher premiums, which are based on age and health. The death benefit may decrease over time too. A level term policy means that both the premium and the death benefit stay the same. Market experts come down strongly on the side of term life insurance because of better value for money.
Whole life insurance can be confusing because it is also called permanent, universal, variable universal and guaranteed universal, all of which have their benefits and limitations and clauses. Whole life means the entire lifespan of the insured person and are valid for up to 100 years of age. In some cases even further that. Whole life policies have considerably higher premiums than term, but they do accumulate cash value, which term life doesn’t.
Buying life insurance is a personal choice, but most people consider it a valid expense. Who doesn’t want to leave their loved ones without financial worries? The problem is finding which is the best for you and the people you wish to benefit from it. The key to understanding what each insurance carrier is offering is comprehending the headings under which they sell the policies and what the insurance carrier exactly means of premiums and benefits. Each different policy has its own limitations, restrictions and clauses. Nowadays it isn’t one size fits all. Life insurance has become much more flexible due to market competition. It is best to shop around and investigate in depth before purchasing any policy. Don’t buy until you fully understand the exact meaning the insurance carrier puts on the legal jargon of every policy.