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BUYING LIFE INSURANCE
Part 3
Last time we discussed who
needs life insurance and how to calculate the amount of life insurance
needed based on your own financial situation. In this article we will
discuss the advantages and disadvantages of various plans of life insurance.
What is term insurance?
Term insurance provides protection
for a specific period of time. It pays a benefit only if you die during the
term period. Some term policies can be renewed when you reach the end of a
specific period, which can be from one to 20 years. The premium rates
increase at each renewal date.
Advantages of term plans-
initially, premiums are generally lower than
those for permanent insurance, allowing you to buy higher levels of coverage
at a younger age when the need for protection is often the greatest. It
is good for covering specific needs that will disappear in time, such as
mortgages or other installment loans.
Disadvantages of term plans-
premiums increase, as you grow
older. Coverage may terminate at the end of the term or may become too
expensive to continue. The policy does not offer cash values or dividends.
What is permanent
insurance? Permanent insurance
provides lifelong protection and is known by a variety of names, Whole Life,
20 Pay Life, Life Paid Up at 65, etc. As long as you pay the necessary
premiums, the death benefit will always be there. These policies are
designed and priced for you to keep over a long period of time. If you do
not intend to keep the policy for the long term, then a term plan would be a
better choice.
Most permanent policies
have a feature known as cash value. This feature which is not found in term
policies provides you with some options. If you need to stop paying premiums
you can use the cash value to continue your current insurance protection for
a specific period of time or to provide a lesser amount of protection to
cover you for as long as you live.
You may borrow from the
PRCUA using the cash values as collateral. Unlike loans from financial
institutions, this loan is not dependent on credit checks or other
restrictions. You ultimately must repay any loan with interest or your
beneficiaries will receive a reduced death benefit.
Keep in mind that with all
types of permanent policies; the cash value of a policy is different from
the policy face amount. The face amount is the money that we will pay at
your death. Cash values are the amounts available to you if you surrender
the policy before it matures or before you die as shown in your policy.
Advantages of permanent
insurance- as
long as the necessary premiums are paid, protection is guaranteed for your
entire life. Generally, premium costs are fixed for the premium paying
period. The policy develops cash values, which can be borrowed against and
can be used to pay future premiums or provide paid up insurance. Dividends
can be paid and used to reduce the amount of premiums needed or purchase
additional paid up insurance.
Disadvantages of permanent
insurance- required premium
levels might make it hard to buy enough protection. It may be more costly
than term if you do not keep it long enough.
In most cases, a permanent
plan is always the best type of life insurance to purchase. However, if you
are young, have a family, a home, etc., and need a large amount of coverage
or if you wish to insure for a specific period of time, then term insurance
is the right plan.
Again, the PRCUA can help
you select the proper plan and amount of coverage. Contact your favorite
agent or our office today
for more information. |
