Choosing a Life Insurance Plan

Choosing a life insurance plan can be confusing if you do not know where to begin. And the best place to begin is simply this: ask yourself this question: do you really need this particular insurance plan? And if you don't then do not buy it. But this, however, does not mean you will not require one at some point or the other in your life since every one of us is exposed to one risk or another at different stages of our lives. Consequently, we will need this, but our life insurance needs differ and can be met by different types of insurance policies.

There are basically two types of life insurance plans and these include: whole life insurance otherwise known as permanent (life) insurance and term life insurance. Whole life insurance can be further divided into three; this includes: traditional whole life, variable life and universal life. With traditional whole life, there are many guarantees; for one, the yearly premiums are guaranteed and so also are death benefits and cash values. Today, many whole life policies are participating, which means dividends can be used to shore up death benefits and/or cash value, reduce premiums or be paid in cash. This type of insurance policy may be the one for you if you are conservative and have problem saving. 

Universal life is designed for those who prefer premium flexibility. Premium in this case can change from one year to another with the possibility of premium not even being paid sometimes. This also has guaranteed maximum premiums, minimum guaranteed death benefits and cash values. Here, instead of a dividend, the insured earns interest based on a determined rate each year. Variable life insurance is designed for the savvy investor who is knowledgeable and is willing to take risks. There are few guarantees here including a guaranteed minimum death benefit and the required yearly premiums, nevertheless this option offers the greatest potential for increasing your cash value over time. 

Term life insurance on the other hand is one where insurance coverage is offered for a time-period of say 20 or even 30 years. After which it can be renewed thereafter to continue coverage. There are basically two options available with term insurance. One is the annual renewal term that allows you to increase premiums, while the other is one where premiums are fixed for a number of years. Most term insurance policies can be converted to whole life insurance.

Finally, before selecting which life policy to purchase it is advisable to conduct research by reading from several sources on the subject. There are some reliable resources online to guide and help you make the right decision for you. Note also that insurance is not wholly an investment tool and should not be used as such as advised by experts. If investment is what you are seeking, then it is better for you to put your money in the stock market.         

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Comments 2 comments

Aussie Insurance 5 years ago

I think that the best point that you make here is how important it is to read up on the subject of life insurance. People who choose to get educated about the topic can better advocate for themselves and are in a stronger position to select the type of life insurance that is right for them. Great job pointing that out!


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jamesrcooper 5 years ago from Rock Hill, SC

Thank you for this article, I appreciate your insight. As a professional in the industry, I would like to offer you my insight as well. I think that the most valid point that you make is Life Insurance is not a great investment. I think, however, that it is somewhat flawed to say that any Insurance vehicle is good for someone who is "conservative" or "has trouble saving".

One of the biggest sales lines used by insurance agent is that cash value policies have "forced savings" for those who aren't "disciplined" enough to save themselves. Well anyone who has ever set up an IRA can tell you that they can be directly deducted from a checking account, or even from a persons paycheck. This takes care of the discipline. A person can cancel this at any time, of course, but they can also quit paying for their policy as well, which they are much more likely to do if their Insurance policy is expensive, as cash value policies tend to be.

As far as "conservative" investing goes, it is true that whole life has a guaranteed rate of return. This rate of return is usually very low, and the first 3-5 years saving disappear, because they go to pay for fees and commissions. A conservative investor could buy bonds and come out better than they would with whole life.

Universal and Variable Life, however, have no such guaranteed rate. Variable Life only guarantees a minimum death benefit, but the investment portion is so "double-dipped" by the insurance company, that it is hardly worth putting money in at all. Universal Life has a rising insurance cost built in that eventually surpasses the premium that is being paid and then begins to take the difference from your cash value until it drains it to nothing. If you don't watch a Universal product like a hawk, you could end up with no savings or insurance, as it will lapse when the cash value runs out, unless you start to fork over a hefty premium every month. Universal and Variable Life are horrible products that I would never recommend to anyone.

I think the biggest problem with cash value products, however, is that most people who own them do not have enough insurance. Most experts will recommend 10-20 years income in coverage. Most cash value policy owners have 2-3 years income. This is because cash value products are so expensive that most people who own them can not afford proper coverage, and the industry pushes cash value products over term because they are much more profitable.

The bottom line is this: most families are better off with Term Life Insurance, preferably a 20-35 year fixed. It gives you the maximum benefit for the smallest premium, and when coupled with a good investment plan, can get a family to a place where they no longer need Life Insurance, as opposed to keeping families forever in need of life insurance, which cash value life insurance does. As a matter of fact, sometimes families who have been in cash value policies for years can still come out better if they switch to term. I've seen it happen time and time again.

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