There are two basic sorts of life insurance policies: term insurance and permanent life insurance. If you choose a term insurance policy, you will get a coverage for a temporary period of time, e.g. 10 or 20 years. On the other hand, when you purchase a permanent life insurance policy, you can be covered for your whole life. Furthermore, there are three sub categories of permanent life insurance policies: Term 100, Universal Life and Whole Life. Universal Life and Whole Life are available in multiple variations. The best insurance for you and your situation can be found in cooperation with a qualified insurance broker.
When you pay the premium for a Whole Life insurance, it already includes the investment part, but in case of Universal Life policies, it is paid apart. Another difference is that for Universal Life policies, the offer of investment options is wider. When you are choosing the best life insurance, the key aspect is that it has to fit your situation and needs. Assuming your needs are met and a permanent policy is within your budget, the following question is whether it’s a sound investment?
Opinions on this subject vary, in part because life insurance as an investment is a very misunderstood topic. The following are the advantages and disadvantages of using life insurance as an investment:
Advantages
* Earnings within the policy and the MTAR limits grow on a tax sheltered basis. For Whole Life policies, the premium is calculated so as no to exceed the MTAR limit. Universal Life policies have a maximum premium set according to the MTAR limit.
* Both the investment part on an increasing death benefit Universal Life insurance and the dividends on a Whole Life insurance are added to the face amount and paid out on top of this face amount, tax free.
* The investment portion on a permanent policy can be used for future premium payments, so that you can pay with pre-tax money rather than after-tax.
* The minimum investment rate guarantees are in excess of 4% for many Universal Life policies. In the current low interest rate world, this is a great advantage.
Drawbacks
* Permanent policies usually have surrender penalties if the client cancels the policy within the first few years.
* For people who don’t have a permanent life insurance need, permanent policies are not a good investment option, because they would have to pay a higher mortality charge for the life insurance.
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