In addition to the numerous types of insurance that can be purchased today to cover all kinds of possible damages or material losses, life insurance also stands out, which in this case, is pre-agreed financial protection or compensation that is granted to relatives or relatives of a person if he dies under certain and determined circumstances.
Life insurance, therefore, has a personal connotation as it implies a desire to ensure some financial stability for loved ones in the event of the contracting party’s premature death.
Life insurance is, for many, a tool they consider necessary because, through this type of policy, their families would have a source of income that would allow them to survive in the absence of the person who contributes most of the income to the family. Or even more, it would protect them against possible debt obligations left by the deceased.
However, it is essential to know the advantages and disadvantages of life insurance before buying one, as there are particularities, costs and risks that should not be taken lightly.
We will then explain what life insurance consists of and its advantages and disadvantages.
Types Of Life Insurance
Life insurance can be purchased in various types, amounts of coverage and conditions, just as can be done with any other kind of insurance against loss or damage on the market.
In the United States, the most frequently sold varieties are Term Life Insurance and what is known as Cash Value Life Insurance.
Cash Value Life Insurance is characterized by the fact that the premiums are intended to pay part of the insurance cost. Still, a part of them is also placed in accompanying investment instruments that grow over time.
Some products related to this policy include variable life, whole life, universal life, and paid insurance.
Despite minor differences, these insurance plans are essentially the same. All Cash Value Life Insurance policies include a death benefit and a cash account that is added when a customer makes a premium payment.
For its part, Term Life Insurance is significantly different from the previous type. It is the most basic of all existing life insurance.
In this model, the interested party chooses how much the policy coverage will amount to and how many years it will be valid.
Policies can be contracted with a duration of 1 to 30 years. In policies equal to or less than five years, it is possible to renew it for a longer time when it expires or change the amount of economic coverage.
In Term Life Insurance, premiums are used solely to pay the cost of coverage. As the name implies, it only covers a specific time.
If a term life insurance policy expires before the insurer’s death, the insurer must purchase another policy to remain covered.
Advantages Of Buying Life Insurance
Both cash-value life insurance and term life insurance have their advantages.
In the case of Cash Value life insurance, the most important benefit is its ability to offer coverage throughout the life of the insured, which is very interesting for young people with families in formation or adults in prime productive age.
In fact, in the United States, young people buy these policies the most, taking advantage of the durability advantage of this type of insurance.
This is because, in the case of a young and healthy contractor, the premiums will be very cheap, even if you choose a significantly higher coverage amount.
For example, in the United States, it is possible to buy insurance with high coverage with initial monthly premiums of as little as US$20 to US$30.
In this case, one of the advantages is that with this small monthly expense, an individual could protect his family at the time of death and have to cover financial debts acquired over the next 2 or 3 decades for things like purchase loans of vehicles, mortgages and paying for their children’s education.
In addition, the cash value accounts linked to these insurances may also be subject to partial withdrawals or collection during the term of the policy, which provides a possibility of income for the insured at any time when needed.
Another advantage is that policyholders are not required to pay taxes on the interest or earnings attached to the cash value accounts of these insurances.
Finally, it should be noted that both companies and entire families can buy these insurances for all their members.
Disadvantages Of Life Insurance
Even with the benefits offered by life insurance, it should also be noted that acquiring one of these instruments has certain disadvantages or problems that it is necessary to know about.
The most significant disadvantage of cash value life insurance is the lack of consistency in premiums, as the monthly cost of premiums can increase over time for various reasons.
This can make an initially cheap policy very expensive for people who depend on a budget in a few years, especially concerning policies with significant coverage.
Also, while many policies contain provisions that dividends from cash accounts can be used to pay premiums, such a situation almost always removes funds from the cash value or investment account.
Added to this is that there is never any guarantee that enough funds will be available to cover lost premiums if an insured falls behind.
As for Term Life Insurance, there are also several notable disadvantages, starting with its duration not being permanent.
Although an insured can enjoy very cheap premiums when they are young, term products expire after a certain number of years or when the insured reaches a certain age.
You must purchase another policy to continue coverage at that time, but new “rates” will apply based on your age and current health.
This often translates into higher premiums or the person being turned down by the insurance company because they are “unfit” for health or age reasons.
In any case, there are certain cases where renewal options are included that do not require proving the suitability of the contracting party to continue with the coverage.
Misconceptions About Life Insurance
When discussing life insurance, many think of a financial payment delivered to a beneficiary or beneficiaries upon the insured’s death.
While this is true, the reality is that there are often conditions that reduce the amount paid to beneficiaries, especially with some types of cash-value life policies.
These policies make a single payment upon the insured’s death, regardless of the cash value account is worth.
For example, if a person owns a whole life policy with a death benefit of $100,000 and a cash value account worth $25,000, the beneficiaries would expect to receive $125,000.
But this does not always happen. In this example, the beneficiary will typically receive only $100,000. Because the cash value account is worth $25,000, the insurance company will only pay $75,000 as a death benefit and another $25,000 from the fund.
With some products, however, beneficiaries are entitled to receive death benefits and cash value accounts when their loved one dies.
However, usually, only an amount equal to the face value of the policy is paid on the death of the insured. For this reason, it is essential to know this information before purchasing cash-value insurance.
