5 Compelling Benefits of Life Insurance

Source: StockMonkeys.com.

Many people take out a life insurance policy in order to protect family members in case the insured person, usually the breadwinner, dies unexpectedly. In fact, life insurance policies are a great way of transferring risk from your family to your insurance provider.

Companies dealing in the life insurance business write so many policies that they are basically risk-neutral, so the companies don't need to bother about whether they have to pay out benefits in case a policyholder dies.

While this business is a win-win for both the policyholder and the insurance company, a variety of other advantages of life insurance policies also deserve attention:

1. Transfer of risk
Fatal accidents happen all the time and, unfortunately, have the potential to cause extraordinary hardship and could push a family into financial distress.

As such, it makes a whole lot of sense to insure the life (and earnings capacity) of the breadwinner in the family. Traditional term life policies basically provide a payment in the case an insurance condition is met, that is, the insured person has died.

2. Investment value
As opposed to term life policies, which frame the conventional understanding of life insurance, whole life policies combine protection benefits with a savings account.

With whole life insurance policies, your premiums consist of two parts: one part compensates the insurance company for the acceptance of insurance risk, the other part builds up a cash value.

This cash value builds up over time as you make your premium payments and the insurance company invests your money. The cash value is also guaranteed by the insurance company.

The bottom line: Whole life insurance products combine traditional life insurance with regular savings at a fixed premium price.

3. Benefit from tax advantages
The investment component in a whole life insurance policy is put to work by the insurance business and likely invested in stocks or bonds, or a combination of those.

However, the buildup in the savings account is tax-deferred, allowing policyholders to grow their investments more quickly compared to an account that would be taxed on an annual basis.

4. Life insurance policies can be collateral
The cash value of your whole life insurance policy is a hard asset, meaning it can be used as collateral and can be borrowed against.

This is a useful feature for a family that, for instance, has a whole life insurance policy with a decent cash value and needs to draw down money for a house down payment.

5. Structured savings approach
If you take out a whole life insurance policy, you are mitigating earnings risk in the case of death, but you are also saving money.

Many Americans save very little money on a regular basis. Based on data from the Federal Reserve Bank of St. Louis, personal savings as a percentage of disposable personal income stood at only 5.3% in June 2014 -- this is substantially below the 10%+ rates Americans saved in the 1960s and 1970s.

Source: Tradingeconomics

A whole life insurance policy holds you accountable and forces you to save at least a part of your premiums on a regular basis. Life insurance, therefore, can be a key pillar of your retirement savings.

The Foolish takeaway
Life insurance policies make a lot of sense when you are the main breadwinner in your family, which you would want to protect in case of your death.

In addition, whole life policies combine insurance protection with a savings account, which is a great way of saving methodically for long periods of time.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2014, at 2:51 PM, QualityTermLife wrote:

    Discussing whole life when writing an article on life insurance for the general public is one thing that has caused people to be so unsure about it that policy ownership is now at an all time low!

    The fact is that for 99% of people TERM life insurance is the least expensive and best answer.

    The typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection and easy to understand and buy.

    So here are Five Compelling Benefits of TERM LIFE Insurance

    1. Insure dependents to replace income

    2. Provide financial security for dependents

    3. Pay-off a mortgage

    4. Fund college

    5. Final expenses.

    One thing you can do is visit an online life insurance site to learn more about life insurance, and the better ones offer free quotes, allowing you to get rate comparisons for most insurance products.

    Quality Term Life has a great site, instant, free and anonymous quotes and tools. Find it at http://www.qualitytermlife.com

  • Report this Comment On August 25, 2014, at 11:44 PM, DolonAltekar wrote:

    Are you kidding. I can't believe this article made it past the fool's editors. Whole life is a horrible product. If you need life insurance buy that and then invest the difference in an index fund. You'll come out way ahead!

    Whole life is the Payday Lender of the middle class!

  • Report this Comment On August 26, 2014, at 11:10 AM, EnaKalkan wrote:

    My husband and I have been shopping for life insurance for a few weeks until we came across 1st Option Insurance. The agent that we spoke to was more knowledgable than others and the company represents more companies than any other agency that I have called. By them doing this, I was able to get a great rate. I highly recommend checking out 1stoptioninsurance.com.

  • Report this Comment On August 27, 2014, at 1:12 PM, BKSD wrote:

    If your "comment" includes a link to an insurance brokerage website, then please go troll someplace else. You bottom feeders make me sick.

    I own $3M of participating whole life insurance and $1M of convertible term. Outside of my business, it's been the greatest performing asset I have ever owned. Being in the highest tax bracket AND in the democratic people's republic of california, it makes a difference for me. 5% on my capital with no tax is like 9%+ for me and my family. Not to mention a perpetually growing death benefit to address inflation.

    Add the fact that I can liquidate an equal amount of capital in my estate during my retirement, essentially doubling the income of the "interest only crowd" (also the fate of the buy term/invest the difference crowd). When I consume assets, I have more net income, less tax exposure (in non qualified environment) and more options to enjoy my life.

    Then, I can annuitize my whole life or take withdrawals to basis then loan to complete the strategy. So note that there is no hate in this advice. Term and whole life are tools. You are advised to learn the mechanics, do the math, and see for yourself. Why is having cash on the balance sheet such a bad thing? Oh I forgot most of all the medial outlets on finance are owned by wall street. Read Pirates of Manhattan before you post your opinions on life insurance next time. Good luck trolls.

  • Report this Comment On November 10, 2014, at 4:27 PM, calebhart54 wrote:

    It's true that life insurance is nice because it transfers risk. I had a friend who's father had passed away in a car accident. He was insured, and his family was compensated. I am so glad that they had insurance because they would have been severely affected. http://www.xmetropolitan.com/coverage/life-insurance/#/

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