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Wednesday, February 2, 2011

Understanding life insurance policies

Life insurance is more than just a way to protect loved one's from adversity, it can also be a tax deferred retirement vehicle, a legally protected way to save money and a method for diversifying investments through managed funds. This article will illustrate the benefits and disadvantages of life insurance as an investment tool for financial planning.

Types of life insurance


Several types of life insurance exist including term, variable, universal and whole life. Each of these insurance policies have different types of insurance coverage with term life being the least and universal life being the most comprehensive.

Term life insurance gives basic coverage for lower premiums, but may also accumulate a cash value over time depending on which company. Variable life and universal life allow the policy holder to also invest a percentage of the premiums in investment instruments managed by the insurance company and whole life is just that, an insurance coverage that offers payment to beneficiaries over the life of the policy holder.

Benefits of life insurance


There are several benefits to having life insurance. Some people may not believe there are benefits because the only people who benefit may be the beneficiaries. While this is true to an extent it is not the whole picture. The video below illustrates how life insurane is used to protect beneficiary income from taxes in addition to the building of protected cash value during the lifetime of the policy owner:




A few of the additional key benefits of life insurance are listed below:

Peace of mind


Knowing that people one cares about will not become destitute in the event of inheritable death, loss of income, death related expenses etc. can be a comforting thought.

Tax deferred savings


Some life insurance packages offer tax-deferred growth that's benefits can be twofold. Firstly, having a lower taxable income can lead to more retained earnings at the end of the tax year. Secondly, if tax rates on income go down in one's retirement, additional tax advantages can be garnered at the time of redemption.

Legal security


Money contained in life insurance policies is legally protected from certain law suits, and garnishments. Knowing that can offer added financial security and protection to an otherwise potentially accessible financial portfolio.

Diversification


Since many life insurance companies manage mutual funds, this can offer the policy holder a means to diversify one's investments thereby lowering overall investment risk. Some of these mutual funds may own shares in international companies that may otherwise be impractical to invest in.

Guaranteed returns


Some insurance policies may also offer guaranteed returns. This in effect offers double the utility i.e. one is not only insuring beneficiaries in the event of death but is also making an investment.

Disadvantages of life insurance


The disadvantages of life insurance may not be as bad as one might think, but there are a few considerations worth taking into account. A few of the factors that may have bearing on one's decision to purchase or continue coverage are listed below:

Yield 


Money placed anywhere is an investment. Even money put in a shoe box is an investment in the sense it is highly accessible thereby an investment in accessible money. However, some investments have better financial rewards than others. Life insurance may not offer the highest returns on invested money.

Market conditions 


If market conditions become very bad, the life insurance investment may lose some or all its value. This may spur additional payments from the life insurance company to 'maintain' the policy. Being aware of adversity conditions in the life insurance contract may provide away to avoid such an occurrence.

Life insurance provider 


Not all life insurance providers offer the same credibility, solvency and claims processing capacity. Depending on which insurance provider one has, one's policy may or may not be entirely protected from insolvency and/or bankruptcy of the insurance provider.

Life insurance is an investment in family, retirement planning and tax savings. If the policy is chosen well and the investment products selected carefully, a life insurance policy can be a beneficial and useful way to accomplish several financial planning objectives all at once. Additionally, individuals may hold one or more different types of policies with an insurance provider, which may provide expanded protection, premium savings and greater financial security.