Life insurance, to many, is a necessary evil. Many policyholders swear by it to protect their families from loss of income and hefty debt obligations in the event of their untimely death. With several types of life insurance on the market, generally speaking, two varieties still remain the most popular: term and whole life, or "cash value" life insurance. Both varieties have pros and cons.
Cash value life insurance are policies in which premiums are used to pay for the cost of insurance, while a portion is placed into attached investment vehicles that grow over time. Some popular cash value life insurance products include variable life, whole life, universal life and paid-up insurance. Despite minor differences, these insurance plans are essentially the same. All cash value life insurance policies contain a death benefit and a cash account that's added to when a client makes a premium payment.
Term life insurance is significantly different than its cash value counterpart. Term life insurance does not contain a cash value account. Premiums are used solely to pay for the cost of coverage. These premiums maintain the level of coverage for a specific "term." At the end of a policy's term, a new policy must be purchased.
Both cash value life and term life insurance have their benefits. The most significant benefit of cash value life insurance is its ability to offer coverage for the entire life of the policyholder. Many people take advantage of buying this type of insurance when they are young when they need it most. Cash value accounts may also be borrowed against or drawn from during the life of the policy. Policyholders are also not required to pay taxes on any interest or earnings attached to cash value accounts.
Individuals and corporations also benefit from term life insurance. The biggest advantage of term life is the often very cheap premiums, especially when a person is young and healthy. It is possible, in many situations, to purchase significantly large face value amounts for monthly costs of $20 to $30. Term life is good for covering financial obligations that will eventually end, such as mortgages, automobile loans and education costs.
With the benefits of both cash value and term life insurance come a few disadvantages. The most significant disadvantage of cash value life insurance is the inconsistency in premiums. Most cash value policies contain required premiums that can increase over time. This can make the policy quite expensive for people on a budget who wish to purchase enough coverage to benefit their family in the event of their death.
Although many policies contain riders in which dividends from cash accounts can be used to pay premiums, such an instance almost always results in taking funds away from the cash value or investment account. There is also never a guarantee that sufficient funds will be available to cover missed premiums in the event a policyholder falls short.
There are also several disadvantages of term insurance, the first being that it is not permanent. Although a policyholder may enjoy extremely cheap premiums when he or she is young, term products expire after a certain number of years, or when the insured reaches a certain age. When a policy expires, a new one must be purchased. This means that a person must qualify for a new program based on his or her current age and health in order for coverage to continue. Many times, this results in much higher premiums or uninsurability. Some term insurance does, however, contain "re-up" or "renewal" options that may not require proof that the customer is insurable to continue coverage.
When you think of life insurance, you think of a death benefit being paid to a beneficiary upon the death of a policyholder. Although this is true, it is important to know that with some insurance, especially many cash value policies, it's often not that simple.
With many cash value life policies, only a single payout is made upon a policyholder's death, regardless of what the cash value account is worth when he dies. For example, if an individual owns a whole life policy with a death benefit of $100,000 and a cash value account worth $25,000, it is common for beneficiaries to expect a payout of $125,000. This is commonly not the case. In this example, a beneficiary would commonly only receive a total of $100,000. Because the cash value account is worth $25,000, the insurance company would only pay $75,000 as a death benefit, with the other $25,000 coming from the cash value account. With some products, however, beneficiaries are, in fact, entitled to receive death benefits in addition to cash value accounts when their loved one dies. However, usually an amount equal to the policy's face value is paid upon death. It is important to know this information before purchasing cash value life insurance.
It is recommended that you consult with an experienced insurance agent before buying life insurance. It is important to find a life product that is tailored to the specific needs of the individual policyholder and his or her family. For example, an individual may only need to protect his or her family from large mortgage obligations for 10 or 15 years. If an individual wishes to be covered by a policy for the remainder of his or her life, then a cash value policy may be in order.
Consider whether using life insurance policies as investment vehicles is a wise move for you. Long term, it may be more profitable to buy term insurance and take advantage of low premiums, then invest in mutual funds or stocks that are not attached to insurance policies.
Jim Hagerty is a writer and journalist who began writing professionally in 1996. He has had articles published in the "Rock River Times," "Builder's Journal" and various websites. He earned a Bachelor of Science in public relations and journalism from Northern Michigan University in Marquette.