How to View Life Insurance As An Investment Tool
A lot of people have been approached about using life insurance as an investment tool. Do you believe that life insurance is an asset or a liability? I will discuss life insurance which I think is one of the best ways to protect your family. Do you buy term insurance or permanent insurance is the main question that people should consider?
Many people choose term insurance because it is the cheapest and provides the most coverage for a stated period of time such as 5, 10, 15, 20 or 30 years.
People are living longer so term insurance may not always be the best investment for everyone. If a person selects the 30 year term option they have the longest period of coverage but that would not be the best for a person in their 20’s because if a 25 year old selects the 30 year term policy then at age 55 the term would end.
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When the person who is 55 years old and is still in great health but still needs life insurance the cost of insurance for a 55 year old can get extremely expensive. Do you buy term and invest the difference?
If you are a disciplined investor this could work for you but is it the best way to pass assets to your heirs tax free? If a person dies during the 30 year term period then the beneficiaries would get the face amount tax free.
If your investments other than life insurance are passed to beneficiaries, in most cases, the investments will not pass tax free to the beneficiaries.
Term insurance is considered temporary insurance and can be beneficial when a person is starting out life. Many term policies have a conversion to a permanent policy if the insured feels the need in the near future,
The next type of policy is whole life insurance. As the policy states it is good for your whole life usually until age 100. This type of policy is being phased out of many life insurance companies. The whole life insurance policy is called permanent life insurance because as long as the premiums are paid the insured will have life insurance until age 100.
These policies are the highest priced life insurance policies but they have a guaranteed cash values. When the whole life policy accumulates over time it builds cash value that can be borrowed by the owner. The whole life policy can have substantial cash value after a period of 15 to 20 years and many investors have taken notice of this.
After a period of time, (20 years usually), the life whole insurance policy can become paid up which means you now have insurance and don’t have to pay anymore and the cash value continues to build.
This is a unique part of the whole life policy that other types of insurance cannot be designed to perform. Life insurance should not be sold because of the cash value accumulation but in periods of extreme monetary needs you don’t need to borrow from a third party because you can borrow from your life insurance policy in case of an emergency.
In the late 80’s and 90’s insurance companies sold products called universal life insurance policies which were supposed to provide life insurance for your whole life. The reality is that these types of insurance policies were poorly designed and many lapsed because as interest rates lowered the policies didn’t perform well and clients were forced to send additional premiums or the policy lapsed.
The universal life policies were a hybrid of term insurance and whole life insurance policies. Some of those policies were tied to the stock market and were called variable universal life insurance policies. My thoughts are variable policies should only be purchased by investors who have a high risk tolerance.
When the stock market goes down the policy owner can lose big and be forced to send in additional premiums to cover the losses or your policy would lapse or terminate.
The design of the universal life policy has had a major change for the better in the current years. Universal life policies are permanent policy which range in ages as high as age 120. Many life insurance providers now sell mainly term and universal life policies. Universal life policies now have a target premium which has a guarantee as long as the premiums are paid the policy will not lapse.
The newest form of universal life insurance is the indexed universal life policy which has performance tied to the S&P Index, Russell Index and the Dow Jones. In a down market you usually have no gain but you have no losses to the policy either. If the market is up you can have a gain but it is limited. If the index market takes a 30% loss then you have what we call the floor which is 0 which means you have no loss but there is no gain. Some insurers will still give as much as 3% gain added to you policy even in a down market.
If the market goes up 30% then you can share in the gain but you are capped so you may only get 6% of the gain and this will depend on the cap rate and the participation rate.
The cap rate helps the insurer because they are taking a risk that if the market goes down the insured will not suffer and if the market goes up the insured can share in a percentage of the gains. Indexed universal life policies also have cash values which can be borrowed.
The best way to look at the difference in cash values is to have your insurance agent show you illustrations so you can see what fits you investment profile.
The index universal life policy has a design which is beneficial to the consumer and the insurer and can be a viable tool in your total investments.
Ignoring A Life Insurance Cover Could Be Fatal
Many of us feel that investing in a life insurance cover is a big burden. This info is especially for them. Statistics suggest that one in four breadwinners in the UK does not have a life insurance.
This is an alarming ratio as the families would be left to live a financially unstable life in the event of the breadwinner’s death.
That means almost one fourth of British families live under the risk of facing an economic crisis. As a solution, the support from NHS or other government schemes could be taken. However, all government support may not be enough for the education of kids, rentals, medication for critical illness or other basic facilities.
Find here some of the myths associated with buying a life insurance policy:
Life insurance is for the man!
A survey suggests that 45% of British men and 38% women are insured for a life cover. Again, both the percentages are quite low. Moreover, its general psyche that women who do not earn do not feel the pressing need of an insurance. It was observed by Cancer Research that more than 130 women die every day due to breast cancer. With such an increasing number of women health issues, women should not keep themselves without a life insurance cover. Again 1 in 3 people is likely to suffer from critical illness. This way, life insurance cover is vital for both men and women. Ignoring a life insurance cover could prove fatal as your family would be left with many financial burdens.
Contents insurance is enough!
Contents insurance is enough! This is another misconception. While we get our car, house, laptops and other accessories insured, we tend take for granted the most important part of the family i.e. its members. Losing a family member especially if one was a breadwinner may result in a sudden financial crux. Your loved ones may need to manage for money required for the daily needs. Thus, even if you have contents insurance it is always important and urgent to buy yourself a life insurance cover. You never know the future but can certainly prepare yourself for the worse.
Mortgage cover would do!
Mortgage is a common thing in the UK. People who have a mortgage should also go for a life cover so that in case of their accidental death, the insurer would pay the remaining mortgage amount.
The facts do not point to any such awareness in the Brits. According to statistics, nearly 50% of people have a mortgage with no associated life cover.
All these facts and figures bring out the importance of life insurance. Be it an existing mortgage, a critical illness or death, a life cover helps the beneficiaries to manage the economic situation easily and comfortably. The lump sum amount received from insurer helps in paying for the funeral cost, mortgage, debts or other family expenses.
Reasons for a life insurance cover:
To support you in case of a critical illness
To support the family in the event of the breadwinner’s death
To manage funeral and other expenses
For financial support to the family in the future
For paying educational expenses of the kids
For mortgage payments
Who needs life insurance cover?
Anybody who has dependents
Newly married couples
Parents with a new born child
Every family that plans for the future
A retiree with a dependent partner
If you have a mortgage
Types of life insurance covers:
There are different types of life insurance policies in the UK. Depending on the age, health and occupation, the life covers are categorised into the following types:
Term insurance: This cover gives your life assurance for a pre-decided and specified interval of time. If the policyholder dies within this time frame then the beneficiaries would get a lump sum amount. Otherwise, the policy will lapse.
Group life cover: It is provided as part of a complete employee benefit package. This cover is for people who die while they are working with the employer. It is not required that the death should have happened during the work hours or in the office premises.
Critical illness cover: This life insurance cover is bought if one has a particular medical condition. If you die due to any other disease or ailment then the policy would lapse.
Over-50 plans: Specially designed for people who have crossed the 50 year mark, this cover pays money that can be used for various financial needs of the beneficiaries. As the policy is taken after 50, one can expect higher premiums.
Whole of life plan: Offers you cover for entire life. It is the best cover to meet your debts or can be left to a loved one when you die.
Reasons why people do not buy life insurance cover:
Lack of awareness: If you think that a certain illness or cancer cannot happen to you then you are living in an illusion. With an increasing risk of sickness and critical ailments, one cannot afford to think that ‘this won’t happen to me’. This is lack of awareness and such a biased optimism may turn out to be fatal. A life cover works well for everyone and is much needed by healthy individuals with dependents.
Too expensive: The premiums would feel nothing when compared with the cost of your life and the amount of damage your death can cause to your family. A small monthly investment as premium would give lump sum amount in case of the policyholder’s death. The return on investment is much higher as far as life cover is concerned. So, there is no point thinking that it is costly.
Government support is enough: Many of us think that NHS and other government schemes would be enough to facilitate the dependents. Well, please check with the friends and family of people who have lost a loved one and who are living on the Government’s support. You will quickly realise that this help is not enough for all the financial expenses of the family. If your partner is suffering from critical illness then the NHS service may not be enough and so, a personal insurance is a must.
Better save than insure: Few of us have a mind-set of savings. In their opinion a decent amount of saving can replace a life insurance cover. Savings may not be the best idea as it takes a longer time to accumulate a big chunk of money. For life insurance covers, we may need to pay monthly or yearly premiums but the total amount received in return is much higher than the premiums paid. This way, insurance gives much more return of investment than savings.
Considering the pros and cons, a life insurance cover seems much more reliable than any other way of ensuring the wellbeing of the dependents and loved ones.
If you have not insured yourself yet then it is high time to get yourself insured so that your demise may not prove fatal for the family. Therefore, do not ignore buying a life insurance cover as it would be the best help to the family in the event of your permanent absence. Isn’t it?
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