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Life insurance comes with great benefits and a few disadvantages. For the average person out there looking to gain a better understanding of life insurance, we put together this list of the top three advantages and disadvantages. We hope that it will help you navigate your own insurance purchase a little better.
Top Life Insurance Advantage: Death Benefit
It's little surprise that we identify death benefit as a top advantage to life insurance.It seems almost too obvious. But let's take some time to dive into what exactly that death benefit represents. I think you'll find the time spent well worth it.
The death benefit offered under a life insurance contract is much larger than the premium required from the policy owner. There are no other financial contracts that promise such a dis-equal deal. You pay a little bit of premium and the life insurance company promises a lot of death benefit.
No matter your financial situation, the minute you purchase life insurance you establish an estate. That estate's value is equal at least to the death benefit of the policy. Your loved ones can use this estate to carry on their lives after you are gone. The cost to accomplish this is relatively small for most people.
Tax Efficiency Another Big Life Insurance Advantage
Some say taxes are the price we pay for a free society. There are others with a different opinion. Where ever you fall along that spectrum, we know with certainty that many people try very hard to reduce the taxes they pay. More American's contribute to Roth IRA's than traditional IRA's.
What if I told you life insurance enjoys several tax benefits that shield most if not all of your money from taxes? It's true.
The death benefit payable is income tax-free to the recipient. Your beneficiary doesn't owe special Required Minimum Distributions like they do when receiving your retirement savings. The stretch provision for IRA's might be gone, but with life insurance, you never had to worry about it.
The cash value in whole and universal life insurance policies is tax-deferred. You can even take the money out of these policies without paying taxes on it. If the policy earns a dividend, special tax code says the dividend is a refund of premium. This special treatment avoids significant tax payments for many Americans.
Life Insurance has the Advantage of Choices
You'd think that a product as old and boring as life insurance would be limited when it comes to choices. You'd also be very wrong. Life insurance companies innovate often. They do this to create products that meet the demands of modern economic times.
Looking for a quick and simple way to offer the protection of your loved ones if you die prematurely? Let's talk about term life insurance.
Want something more permanent you can use as a part of your larger financial plan? You have a plethora of options with whole life and universal life insurance.
The industry isn't complacent with just having an array of different product options. Life insurers work to create products that match the needs evolving economies. The industry several decades ago adding an investment option to life insurance products. More recently added indexed products offer higher returns without significant investment loss exposure.
Top Life Insurance Disadvantage: Requires Approval
While life insurance is great in a lot of ways, it's not immune to some drawbacks. The biggest one we can identify is the fact that you can't just buy it because you want to. The life insurance company has to approve your application for life insurance. This isn't always easy for everyone.
This means that an underwriter must review your application, and approve it. If you're healthy, you'll have few problems. If you're not in great health, approval could prove more difficult. But don't despair. Improvements in medicine allow life insurers to approve applicants they once rejected.
Difficulty Comparing Products Another Life Insurance Drawback
You might notice that there's no life insurance mart in the strip mall. And while you can shop for and compare several products at Amazon, life insurance isn't one of them. Instead, you have to seek out life insurance agents who provide you with quotes. Do these quotes encompass all your options? It's unlikely. How do you know if he/she is leaving out a better option? Sadly, there is no good answer.
The face-to-face transaction dominates life insurance purchases. This transactional method can have loads of benefits. You might forge a great relationship from it. But it makes shopping and comparing life insurance difficult. You can, however, get a second or third opinion about your options.
Confusing Benefits Another Life Insurance Disadvantage
Life insurance policies are legal contracts. They bind a life insurer to provide a certain benefit in return for a sum of money. These benefits often go fulfilled without a hitch. But there are times when policy owner confusion causes some unintended animosity.
Attorneys write life insurance contracts. Their goal is to be precise in the ever-growing expanse of legal precedent. That means the contracts aren't written in a way that's easy to understand by just anyone.
Insurance company employee and agent confusion can add to this problem. There are times that one might misconstrue a benefit on accident. Insurers do not make exceptions due to someone's mistaken thoughts about a policy. This is true of employees, agents, and policyholders.
To be sure, little confusion exists about the payment of a death benefit on a life insurance policy. But some policies have extra benefits that cause confusion. This confusion usually concerns how exactly this extra benefit works.
Despite Life Insurance Advantages and Disadvantages Still Well Worth It
We hope that by highlighting the top life insurance advantages and disadvantages you better understand both the good and the bad about life insurance. But we also hope that you see the great benefits life insurance can provide for you and your loved ones. Without life insurance, many people would find themselves in a financially disastrous situation.
So be aware of the disadvantages and be ready for them as you seek to figure out your own life insurance purchase. At the same time, be ready for the peace of mind and many other benefits the product affords you.
