There are many types of life insurance. Perhaps this is a good thing, but finding the ideal insurance to meet your needs will be more demanding. Going for the least expensive option seems an easy and smart choice. But not always – you may end up paying more for cheap life insurance in the long run, according to Ottawa Certified Financial Planners.
The term insurance is the cheapest of the lot. It comes with a set death benefit for a specific amount of time, for instance, 10 years, 15 years, 20 years, etc. But the downside is the massive increase in premium that happens every time the policy automatically renews. For example, if it renews every ten years, the premium will increase from that point on. Another downside is that the beneficiary outlasts it. In most cases, a term plan will expire before the beneficiary’s life expectancy.
On the other hand, permanent insurance usually lasts until the holder’s demise. There are various forms of permanent insurance, including whole life insurance, which is the most successful and one of the oldest.
How are policy prices set?
Let’s talk about how the premiums of all life insurance policies are set. The rule of thumb is that policyholders pay their premiums as and when due and expect the benefits to be paid out on the holder’s demise. Actuaries, a special breed of mathematicians, can estimate the expected cost of any death benefits paid out annually. And this is the premise on which policy premiums are based.
However, these estimations by actuaries are conservative, ensuring the funds on the ground can conveniently cover any deaths within a specific year. Now, you may want to ask, what if fewer people than estimated die within a year? Or if the fund had more returns than expected? Well, the difference goes into the coffers of the insurance company.
How is life insurance different?
When it comes to whole life insurance, the difference mentioned above goes back to the clients as dividends. The clients can use the dividends to purchase more paid-up insurance. Consequently, the death benefit increases with time, with the premiums unchanged. Whole life insurance policies are thus enticing because they ensure your death benefit never reduces, your premium never increases, and you can boost your cash surrender values.
Can whole life insurance meet your needs?
While whole life policies come with exciting perks, you must be ready to pay more in costs. So, if you are spending more than usual on such insurance, it is best to know it meets all your needs. Whole life policies are best suited for two scenarios.
Scenario 1: To maximize that estate you are leaving behind for your loved ones. The usually favorable rates of whole life policies, and the tax-free nature of the death benefits, meaning it is an excellent means of building a great legacy.
Scenario 2: To build up value for use while you are alive. Considering it’s a product that builds early cash values, you can borrow against the value for your lifetime needs, including education, retirement, and others. Then, on your demise, the tax-free death benefit goes into settling any unpaid debts.
Finally…
Purchasing the right insurance for your needs can be tricky. But it’s nothing an Ottawa CFP cannot help you navigate. Feel free to reach out for a consultation today.
