Life Assurance Adalah – When considering adding life insurance to your financial plan, it’s important to determine whether paying premiums over many years is worth it. Whether life insurance is a smart investment for you may depend on how much benefit you want from the policy.
If you just want to be sure that your loved ones will be financially secure if you die and lose your income, life insurance is probably worth it even if you outlive the policy. But if you’re wondering whether a term policy is a good way to receive tax-free investment benefits while you’re alive, the answer is that most people would be better off taking out a term policy and putting the rest of the money into other types of tax-free investments.
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When deciding whether life insurance is a good investment, it’s first important to understand what types of policies you can buy. There are several life insurance plan options with multiple life insurance companies to choose from, but they generally fall into two categories: permanent and term.
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Permanent life insurance is designed to cover you for a specific period of time, hence its name. For example, you can buy a whole life policy with a term of 20 or 30 years. These policies work much like other types of insurance you may have, such as car insurance; you pay a premium every month and if something bad happens (in this case your untimely death) you get compensated.
Permanent life insurance, on the other hand, covers you for life as long as the premiums are paid. Some types of permanent life insurance may also have an investment component that allows policyholders to accumulate cash value. When you hear financial advisors and even more often life insurance agents touting life insurance as an investment, they are talking about the cash value component of permanent life insurance and the ways you can invest and borrow that money.
There are many arguments for using permanent life insurance as an investment. However, many of these benefits are not unique to permanent life insurance. You can often get them in other ways without paying the high management costs and agency fees that come with permanent life insurance. Here are some of the most widespread benefits of permanent life insurance.
Permanent life insurance policies that have an investment component allow you to grow your wealth tax-deferred. This means you don’t pay tax on any interest, dividends or capital gains on the cash value of your life insurance policy until you withdraw the proceeds.
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This is similar to the tax benefits you get with some retirement accounts, including IRAs, 401(k)s, and 403(b)s. If you’ve been increasing your contributions to these accounts year after year, it may make sense to invest in permanent life insurance for tax reasons.
Another touted benefit of permanent life insurance is that you don’t lose coverage after a certain number of years. The policy ends when you reach the end of your term, which for many policyholders is 60, while a permanent policy can cover you for life. If you expect people (such as a disabled child) to be financially dependent on you beyond the normal policy term, this benefit may be attractive to you.
If you need money to buy a house or pay for college, you can borrow money against the cash value of a permanent life insurance policy. Conversely, if you put money into a tax-advantaged retirement plan like a 401(k) and want to use it for purposes other than retirement, you may have to pay penalties. In addition, some retirement plans, such as 457(b), make it difficult or even impossible to borrow money for such purposes or before you leave your employer.
You can receive between 25% and 100% of your death benefit from your permanent life insurance policy until you die if you develop a certain condition such as a heart attack, stroke, invasive cancer or end-stage renal failure. The advantage of accelerated benefits, as they are called, is that you can use them to pay medical bills and potentially improve your quality of life in the final months.
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While permanent life insurance can offer many advantages, there are also some potential disadvantages to consider. Cost is one of the most important. Compared to a term life insurance policy, you may have to pay higher premiums for permanent life insurance. If it turns out you don’t need whole life insurance, you may be paying premiums unnecessarily.
Permanent life insurance can also have tax implications for you or your beneficiaries if you decide to cancel the policy or die with an outstanding loan. In addition, taking credits or accelerated benefits can reduce the death benefit paid to your beneficiaries when you die.
Term life insurance can be a good investment if you don’t want to leave your loved ones with the burden of paying off debts or other expenses. Here are some of the most important benefits of buying an insurance policy.
Term life insurance is generally less expensive than permanent life insurance. This is because you are only insured for a certain period of time, so the insurance company assumes less risk. The younger and healthier you are when you take out life insurance, the lower your premiums will be.
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No-exam life insurance policies may allow you to skip the medical exam, but they may carry higher premiums.
One of the benefits of term life insurance is that you can choose how long you want the coverage for. So if you think you will only need life insurance for 10 or 20 years, you can choose the term that suits your needs. This means you have predictable lifetime premium estimates. On the other hand, a permanent life policy is more of a guessing game as it does not have a set end date.
If you decide you want to extend your policy indefinitely, the insurance company may allow you to convert it to permanent life insurance. This may increase your premiums, but may be a worthwhile investment if you want lifetime coverage. A conversion can also give you an opportunity to accumulate cash value.
When you buy an insurance policy, all your premiums go towards providing death benefits to your beneficiaries. Unlike term life insurance, permanent life insurance has no cash value and therefore no investment component. If you’re still alive at the end of the term, the policy will simply lapse and you and your beneficiaries won’t see any money.
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However, you can look at life insurance as an investment in the sense that you pay relatively small premiums in exchange for the peace of mind of knowing that your beneficiaries will receive a relatively large payout in the event of your death.
A 30-year-old non-smoker in excellent health can get a 20-year policy with $1 million in death benefits for about $425 a year. If this woman dies at age 49 after paying premiums for 19 years, her beneficiaries will receive $1 million tax-free after she paid just $8,075.
Permanent life insurance provides an unmatched return on investment (ROI) should your beneficiaries ever need to use it. However, this provides a negative return on investment if you are among the majority of policyholders whose beneficiaries never file a claim because the policy has lapsed. That way, you’ll pay a relatively small price for peace of mind and get to celebrate the fact that you’re still alive.
What if the same woman described above took out permanent life insurance instead? For a term life insurance policy from the same insurance company, she could expect to pay about $9,370 per year. So what cash value will she receive for these additional costs?
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But if, after 20 years, someone bought a term contract for $480 per year and invested the $8,890 difference for an average annual return of 8%, they would have $421,064 before taxes.
“Sure,” you say, “but a permanent life insurance policy guarantees its return. I’m not guaranteed an 8% return on the market.” That’s the truth. But even if the woman put an extra $8,890 a year into a 1% interest savings account, she would have $196,425 after 20 years, still more than the $181,630 guaranteed cash value of the permanent policy.
Using permanent life insurance as an investment may make sense for some wealthy individuals who want to minimize estate taxes. But for the average person, buying for a certain period of time and investing the difference is usually the best option.
Even if you’re buying life insurance primarily for investment purposes, it’s still important to research the best life insurance companies to ensure you’re getting the best value policy.
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Deciding whether life insurance is a smart investment can depend on what each person wants and needs from the policy. It is common for people who are not wealthy to buy term life insurance instead of whole life insurance and invest the price difference between the two.
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