05
Oct-21
Life insurance is something you may consider adding to your financial plan if you're interested in providing a measure of security for your loved ones. Proceeds from a life insurance policy can be used to pay final expenses, eliminate outstanding debts, or cover day-to-day expenses. Whether life insurance is a smart investment may depend on what you need and want a policy to do for you.
Pros and Cons of Term Life Insurance
Term life insurance could be a good investment if you don't want to leave your loved ones with the burden of paying off debt or other expenses. Here are some of the most important benefits of purchasing a term life policy.
Pro: Lower premiums
Term life is generally less expensive to purchase compared to permanent life insurance. That's because the insurance company assumes less risk since you're only insured for a set time period. The younger and healthier you are when you buy a term life policy, the lower your premiums are likely to be.
Pro: Flexibility
One advantage of term life insurance is that you can choose how long you want to be covered. So if you think you'll only need life insurance for 10 years or 20 years, you can choose a term that matches up with your needs. That means you have predictability in estimating how much you'll pay in premiums over the entire term. A permanent life policy, on the other hand, would be more of a guessing game since there's no fixed end date.
Pros: Convert to permanent insurance
If you decide you want to extend your term life policy indefinitely, you could convert it to permanent life insurance coverage. Doing so may increase your premiums but it may be a worthwhile investment if you want to have coverage for life. Converting could also give you the opportunity to accumulate cash value.
Cons of Term Life Insurance
When you buy a term policy, all of your premiums go toward securing a death benefit for your beneficiaries. Term life insurance, unlike permanent life insurance, does not have any cash value and therefore does not have any investment component.5 If you're still alive when the term ends, the policy simply lapses and you and your beneficiaries don't see any money.
However, you can think of term life insurance as an investment in the sense that you are paying relatively little in premiums in exchange for the peace of mind knowing that in the event of your death, your beneficiaries will receive a relatively large death benefit.
If you are interested in a policy for a fixed period with a built-in savings mechanism that rewards you for your payments later on, a return of premium (ROP) life insurance policy may be an attractive option. You'll pay a flat rate for the duration of your policy, but unlike traditional term life insurance coverage, you'll get all your money back at the end of the term.
source: https://www.investopedia.com/articles/active-trading/120814/life-insurance-smart-investment.asp