By wr_root People usually buy insurance for their home, car, and medical needs, but many people don’t think life insurance is very useful. In fact, life insurance is mainly to protect the rights and interests of family members, and some types of insurance can also achieve tax avoidance, investment, and value-added effects. This article is about general life insurance knowledge, not professional investment advice.
What are the reasons for buying life insurance?
The reason for buying life insurance is simple and clear, which is also what the reader asked at the beginning, because we need protection and savings. The most important thing to buy life insurance is the financial pillar of the family. There are often unexpected situations in life. In the event that the pillar of the family falls, the claim can at least provide the family a financial protection. If you buy life insurance for yourself, the insured is the insured. Different types of life insurance also have the following functions:
- Family protection: In the event of the insured’s death, the insurance company can pay a certain amount to protect the beneficiary’s daily life. Some additional insurance also includes critical illness and disability protection.
- Savings function: Some types of life insurance can accumulate cash value and play a role in saving.
- Investment appreciation: There are some life insurance policies that allow policyholders to invest a portion of their insurance premiums and earn a return.
- Tax avoidance function: Death claims are not subject to inheritance tax, and cash accrual from life insurance is not subject to personal income tax.
- Retirement benefits: The insured can draw insurance premiums as a pension when they reach retirement age or when the policy expires.
- Afterlife care: Some life insurance policies allow the insured to receive a portion of the cash on a regular basis to pay for long-term care.
- Personal Loans: Policyholders can apply for a loan from a bank or insurance company with a cash-valued policy as collateral.
What does cash value mean?
When buying life insurance, we often hear a word – cash value, but not all life insurance has cash value.
After the policy takes effect, the insurance company will bear certain risk protection costs, which will affect its operating costs. In addition, the insurance company also needs to bear a number of operating costs such as management fees, advertising expenses, etc.
In order to increase investment value, the insurance company will invest the policyholder’s insurance premiums, and also incur expenses such as handling fees.
After deducting the above costs from the insurance premiums paid by us, the amount obtained plus the interest incurred is the cash value.
Young people are less likely to die, and it is common sense that the initial cash value of life insurance should accumulate a lot.
However, because insurance companies need to take into account the surrender rate, in order to allow the policyholder to hold the policy for a long time rather than choose to surrender, the initial cash value will be reduced.
Therefore, if we choose to surrender the policy after a few years of insurance, it is almost impossible to get back the full insurance premium.
The role of cash value is to:
- Refund when you surrender: People’s life insurance with cash value can get back the accumulated cash value when they surrender halfway through. The cash value of the policy in the previous period may be low or even zero, so surrendering at this time may cause unnecessary losses; if you surrender after a certain period of time, although you can get back the current cash value, this value may be lower than the original insurance premium paid, because some of it has already been used as insurance costs. Only after the policy expires can the cash value equal the sum of the premium insurance and dividends.
- Earn income: The interest rate and bonus promised by the insurance company are not based on the premiums you pay, but on the cash value.
- Personal loan: The policyholder can mortgage the policy with cash value to the bank or insurance company and apply for a personal loan with a maximum loan amount not higher than the accumulated cash value of the policy.
What are the types of life insurance?
There are two basic types of life insurance, including term life insurance and cash value life insurance. Cash value life insurance can be further divided into whole life insurance, universal life insurance, flexible life insurance, index life insurance, etc.
Term Life Insurance
Term Insurance is the oldest type of life insurance and typically covers a specific period of time.
The insured pays a premium to the insurance company during this time and if the insured dies during this period, the insurance company will pay out the promised sum.
However, if the insured passes away after the policy ends, the insurance company will not provide a payout. The terms of the policy can range from 10, 20, to 30 years, and so on.
Features of Term Life Insurance
- The insurance premium of this insurance product is relatively low, but the insured amount is quite high, and the annual insurance premium is very affordable and has a very high leverage ratio.
- Term life insurance can be divided into refundable and non-refundable types. Refundable type is also called principal insured term life insurance, that is, if the insured does not die within the policy period, the policyholder can get back the insurance premium paid before the policy expires; if the policyholder surrenders the insurance halfway, he can also get back part of the insurance premium. Non-refundable life insurance is like consumption. If the insured does not die within the period, or surrenders halfway, the policyholder cannot get back the insurance premium paid before.
- The product can be converted into whole life insurance: Some insurance companies offer insurance conversion terms, and if the conditions are met, term life insurance can be converted into whole life insurance, but the relative insurance premium will also increase.
Disadvantages of Term Life Insurance
Under normal circumstances, term life insurance has no cash value, especially non-refundable term life insurance, which is essentially spending money to buy peace of mind.
Although refundable term life insurance has a certain cash value, it cannot exceed the sum of insurance premiums and does not have a value-added effect.
Taking into account inflation, the insurance premium recovered after the policy expires has actually depreciated.
In addition, if the policy is still expected to be renewed after the policy expires, the insurance premium will increase significantly.
Whole Life Insurance
If the insurance premium is paid on time, the insured can enjoy the protection of the whole life insurance for the period of protection until the end of life.
Features of Whole Life Insurance
- Whole life insurance will provide protection after the death of the insured, so whenever the insured dies, the insurance company will pay the insured amount.
- Includes cash value: The insurance company uses a part of the insurance premium as the cost of insurance, and invests the rest of the insurance premium cautiously. Over time, the cash value in the policy will gradually increase. You can also get some cash back if you surrender the policy halfway through.
- Cash value has interest and dividends: Insurance companies will pay dividends on cash value based on the company’s profitability, and will also pay a fixed interest on cash value.
- Periodic payment protection for life: Some insurance companies can divide the lifetime insurance premium equally to 10 years/20 years/30 years through the formula. If the policyholder pays the insurance premium within 10 years/20 years/30 years, there is no need to pay the insurance premium, but the protection can still be extended for life.
Disadvantages of whole life insurance
Whole life insurance premiums are much higher than term life insurance because the insured’s probability of death or serious illness increases significantly with age, so insurance premiums continue to increase.
When the insured (and probably the insured) is older and has less income, they will not be able to afford the increasing insurance premiums.
To deal with this situation, and to promote the product, many insurance companies use formulas to fix the insurance premium into an equilibrium fee, that is, the insurance premium is the same every year.
However, whichever way you pay, the insurance premium for whole life insurance is quite expensive compared to term life insurance.
Universal Life Insurance
Universal life insurance is a type of life insurance with stronger savings function. A portion of the insurance premium is invested in a separate investment account after the cost of insurance is paid.
Features of Universal Life Insurance
- Lifetime protection: As long as the insurance premium in the policy can cover the cost of insurance, the policy will remain valid.
- With cash value and appreciation function: After the insurance premium is paid, the remaining part is cash value and will be invested in the investment account. Investment is mainly in the conservative bond market.
- Flexible payment: The policyholder is free to choose the amount, frequency and time of payment. The policyholder can choose to pay more or less according to their income, but at least meet the insurance cost. The insurance company will set a minimum payment amount.
Disadvantages of Universal Life Insurance
Universal life insurance has the risk of disinsurance.
The return on investment of universal life insurance is affected by the interest rate market. If the interest rate falls, the return on investment will be low, the insurance cost will increase, and the insurance premium will increase accordingly.
If the policyholder does not pay the premium in time, or the insurance premium paid is not enough to cover the insurance cost, the accumulated cash value will be used to cover the insurance cost, resulting in a lower death claim.
When the cash value in the account is not enough to cover the insurance cost, the insurance will be discontinued, and because the cash value has been used up, the policyholder cannot get back the insurance premium paid before.
The risk of universal life insurance determines that its insurance premium is cheaper than that of whole life insurance.
There are several derivatives of universal life insurance.
Guaranteed Universal Life Insurance
The cash value of guaranteed universal life insurance also exists, but it is more similar to the fixed-term payment of whole life insurance.
The insured needs to pay the insurance premium on time within a certain period of time (such as 30 years).
Regardless of the rise and fall of the market, the insurance premium and insurance amount remain unchanged, and the policy is valid forever. However, unlike whole life insurance, guaranteed universal life insurance has lower requirements on the health status of the insured, as long as the insured can pay the insurance premium, it can be insured.
Variable Universal Life Insurance
Investment universal insurance, as the name suggests, is an insurance product with investment as the main purpose.
The policyholder can choose to invest within the scope of the fund provided by the insurance company. This ROI is not capped or guaranteed, and may earn profits or suffer losses. If the investment loses money, the cash value will be reduced, and the policyholder needs to increase the insurance premium or reduce the claim to maintain the validity of the policy.
For ordinary policyholders, investment universal insurance is not highly protective and risky, but for those with a keen investment vision, it may bring rich returns.
Index Universal Life Insurance
Index universal insurance is a universal insurance that tracks major stock market indices, and its income has an upper and lower limit.
The insurance premium paid by the policyholder every year, after deducting the insurance cost, will be invested in the fixed interest account and the index account respectively.
The insurance company will set the income limit of the fixed interest account. If the stock market is doing well, the income above the upper limit will go to the insurance company.
In the case of a decline in the stock market index, the insurance company will also provide a guaranteed income of 1-2%. However, the income of the index account is uncertain and may be 0%.
As the insured age, the insurance premium will increase accordingly, and only 1-2% of the guaranteed income cannot fully pay the insurance premium, and the policyholder needs to continue to pay more insurance premiums to maintain the validity of the policy.
How to Choose Life Insurance
No insurance policy is perfect, and everyone’s needs are different. When shopping for life insurance, first choose the one that suits our needs, and second, choose the one we can afford.
After determining the type of insurance you need, you can ask different insurance companies for quotes, not only to compare insurance premiums and amounts, but also to pay attention to the following points:
- Will insurance premiums be adjusted annually?
- What is the rate of return? Will there be phased changes?
- What benefits are guaranteed and what benefits are not.
- Is the value of cash growing fast?
- Is there any additional insurance recommendation that suits my needs?
Websites like www.ehealthinsurance.com have specialized health and life insurance comparison features.
