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No one can deny that life insurance is something we all need. The thought that when we are gone, our loved ones will be financially secure can give us peace of mind and motivate us to work harder. Whole life insurance is permanent and one of the most beneficial life insurance policies due to its saving or cash accumulation component (cash value), leading to huge payouts. This is especially true if your net worth is high or has life-long dependents.
However, there is no denying that whole life insurance is not for everybody. One of its biggest drawbacks is that the premiums are significantly higher than other life insurance options. And that you have to pay them for the rest of your life – there is a penalty for surrendering the policy early.
This has led to many people looking for alternatives to whole life insurance. Luckily, there are are a couple of options that one can choose from that may actually be better.
Term Life Insurance
Term life insurance is usually the go-to option for many people who can’t afford whole life insurance. Its premiums are lower since there is no cash accumulation component, and the policy runs for a fixed term (temporary life insurance). If you, as a policyholder, dies before the expiry of the term, your beneficiaries will get the agreed-upon death benefit. But if you die after the policy expires, your beneficiaries get nothing.
Based on information from InsureChance.com, a life insurance website, you have the option to renew the policy after it expires – terms are usually 15, 20 or 30 years. And since the premiums are 6-10 times lower than whole life insurance, you can simply purchase more coverage. This can help you increase the likelihood that you won’t die after the policy expires.
For example, let’s say you have a family you wish to financially secure after you die. You can buy a 15-year term life insurance policy worth $700,000 that you have to pay $70 every month. If you die within the 15-year period, your wife and kids will receive $700,000. But if you die after the 15-year term without renewing the policy, your family will get nothing.
If you are 50 years old, and you renew the policy, you will still get the base premium. However, you are not guaranteed insurability since your situation might have changed – you might have gotten a terminal illness – that can make you risky to insure.
Variable Life insurance
If term life is not for and you want more payout for beneficiaries and are willing to take a risk, then variable life insurance is for you. Like whole life insurance, variable life insurance is also permanent. The only difference is that a portion of your monthly or yearly premium goes into what is known as the policy’s cash value, which you use to build wealth.
The cash value is like a sub-account that you can invest in the market – similar to opening a mutual fund. Your insurer will give you a range of investments, allowing to choose which ones you want to take a chance on. These include a variety and bonds, stocks and mutual funds, among others.
You must keep in mind that these investments are vulnerable to market fluctuations. There are no fixed interest rates, only returns based on market performance. As such, your insurer cannot make a guarantee that you will make any returns (no one knows which way the market will go). This is what makes variable life insurance extremely risky since your cash value can either increase or decrease.
However, with more risk comes great reward. This means that variable life insurance has the potential to pay out more than whole life insurance. And the best part is that you can get a tax-free, low-interest loan against your cash value – up to 90%.
Universal Life Insurance
Universe life insurance is permanent life insurance that combines the benefits of low premiums from term life with the investing component of variable life insurance. What’s more, it is flexible, allowing you to adjust your premiums and death benefit based on your financial needs. This makes a lot of sense since the premiums grow as time goes by – getting more expensive with age.
As with variable insurance, you will have a cash value. But instead of it being based on returns, you will get a fixed interest rate. This means less risk for you, as compared to variable life insurance since you don’t have to deal with market fluctuations. Furthermore, you can also borrow against your cash value by taking out a tax-free, low-interest loan.
If you fail to pay your monthly income, a portion of the cash value will be used to cover it. You simply won’t be given a fixed time period to pay the premium.
If any of the insurance options above don’t seem affordable to you (maybe you have been turned down for all of them), you can self-insure. After all, the whole point of doing this is for your beneficiaries, usually your family, to be financially protected when you are gone.
You can take a cue from variable insurance and invest money into an investment account. An example of such an account is a mutual fund. This usually also comes with a fixed period of investment. Some investment periods for mutual funds are three years, but if you lock in a 10-year investment period, you could walk away with quite a bit of money.
However, it is worth mentioning that there is a risk involved with mutual funds since the money is invested in securities. However, the mutual fund is tailored to your individual investment needs to prevent you from taking on more risk than you need to.
As you can see, whole life insurance is not the only way to get life insurance. There are a number of options, from term life insurance to self-insurance. You can choose the one that is best for you based on your preferences and/or finances. In the end, you will be able to live your beneficiaries in the better off position after you depart the earth.