In addition to the many types of insurance that can be acquired today to cover all kinds of possible damages or material losses, life insurance also stands out, which in this case is pre-agreed economic protection or compensation granted to the debts or relatives of a person if he dies under certain and certain circumstances.
Life insurance, therefore, has a personal connotation it implies a desire to ensure some economic stability to loved ones in case of premature death of the contractor.
In fact, life insurance is for many a tool that they consider necessary, because through this type of policies their families would have a source of income that would allow them to subsist in the absence of who contributes the majority of the income to the family, or more, it would protect them against possible debt obligations left by the deceased.
However, it is important to know what are 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 it is and what are the advantages and disadvantages of life insurance.
Life insurance is a type of insurance through which the insured guarantees stability for his family in the case of death or permanent permanent disability.
Through life insurance, the person who hires it ensures that their spouse and children have the necessary means to take care of housing debts, as well as living expenses. burial.
The insured companies offer their clients different coverage for the following life insurance modalities:
- Individuals: this is the type of life insurance in which a person insures the future of his family.
- Company: life insurance for companies is a type of insurance that provides future stability for workers in the event of death and absolute and permanent disability with capital.
Advantages of Life Insurance
Among the main advantages offered by hiring life insurance are:
- Peace of mind: It is one of the most important factors of this type of insurance since its contract offers a future for the family without financial worries.
- Permanent disability: In the case of permanent disability, the insurance company will grant the insured a supplement to the pension provided by the State.
- Tax benefits: Some life insurances enjoy tax privileges.
- Fractional Payment: Insurance companies generally allow the payment of the premium monthly, quarterly, semi-annually or annually.
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 training or adults in full productive age.
In fact, in the United States, it is the young people who most acquire these policies, taking advantage of the durability advantage of this type of insurance.
This happens because in the case of a young and in good health contractor, premiums will be very cheap even if you choose a significantly high coverage amount.
For example, in the United States, it is possible in many cases to buy insurance with high coverage with initial monthly premiums of just US $20 to the 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 payment of education of their children.
In addition, cash value accounts linked to these insurances may also be subject to partial withdrawals or collection during the term of the policy, which gives a possibility of income for the insured at any time they need it.
Another advantage is that the insured are not obliged to pay taxes on 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
Among the main disadvantages that life insurance usually has are:
- Duration: life insurance usually lasts for so many years that many insured for various reasons cannot continue to pay premiums.
- Permanence: at the time of signing a life insurance a term of permanence is established. If the contract is terminated before the deadline indicated in the life insurance policy, the insured must pay a penalty or lose the money he had quoted.
- Investment risk: when signing a life insurance contract, it must be carried out in a solid company so that the risk of recovery of the benefits is lower.
- Full capital: One of the disadvantages of the life insurance contract is that upon receiving the capital in full, the taxes to be paid are high, being the best option by means of income quotas if possible.
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 need to be known.
The most significant disadvantage of life insurance in cash value is the lack of consistency in premiums, as the monthly cost of these may increase over time for various reasons.
This can make an initially cheap policy in a few years become something very expensive to pay for people who depend on a budget, especially if we talk about policies with significant coverage.
In addition, although many of the policies contain clauses in which dividends from cash accounts can be used to pay premiums, this situation almost always results in removing funds from the cash value or from the investment account.
To this is added that there is never a guarantee that there will be sufficient funds available to cover the lost premiums in the event that an insured is late.
As for Term Life Insurance, there are also several notable disadvantages, beginning with the fact that its duration is not permanent.
Although an insured can enjoy very cheap premiums when he is young, term products expire after a certain number of years, or when the insured reaches a certain age.
At that time, you must buy another policy to continue enjoying the coverage, but new “rates” will now apply based on your current age and health.
Many times, this translates into higher premiums or that the person is rejected by the insurance company because it is “unfit” for reasons of health or age.
In any case, there are certain cases where renewal options are included that do not require proof of the contractor’s suitability to continue coverage.
Misconceptions about life insurance
When talking about life insurance, many people think of an economic payment given to a beneficiary or beneficiaries after the insured’s death.
While this is true, the reality is that there are usually conditions that reduce the amount paid to beneficiaries, especially with some types of life policy with cash value.
In this type of policy, only one payment is made after the insured’s death, regardless of what the cash value account is worth at that time.
For example, if a person has a whole life policy with a death benefit of US $ 100,000 and a cash value account worth the US $25,000, the beneficiaries would expect to receive a payment of US $ 125,000.
But this does not always happen. In this example, the beneficiary will normally only receive a total of US $ 100,000. Because the cash value account is worth the US $ 25,000, the insurance company will only pay the US $75,000 as compensation for death and another US $ 25,000 from the cash value account.
With some products, however, beneficiaries have the right to receive death benefits, in addition to cash value accounts when their loved one dies.
However, only an amount equal to the nominal value of the policy is paid with the insured’s death. For this reason, it is important to know this information before buying cash value insurance.
Recommendations when buying Life Insurance
It is recommended that you consult with an experienced insurance agent before buying life insurance. It is also important that you choose a product that suits the specific needs of the individual policy and your family.
For example, it may be that your concern is only to protect your family from the biggest mortgage obligations for the next 10 or 15 years.
If you want to be covered by a policy for the rest of your life, then a cash value policy is the most convenient.
Consider whether the use of life insurance as investment vehicles is a smart move for you.
In the long term, it may be more profitable to buy term life insurance and take advantage of low premiums and then invest the money you have available in other types of financial tools not linked to insurance policies, such as mutual funds or stocks.