Pros and Cons of Life Insurance

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While the unpredictability of life is what makes it enthralling, it also makes the planning of your next financial move immensely difficult. You may still manage when you are alone. However, things change drastically when you have dependents to take care of. This is where life insurance plans come into the picture, ensuring the financial well-being of your family in case of your untimely death.

At the same time, there have been quite a lot of speculations about life insurance investment pros and cons. Consequently, several potential policyholders wonder if it is indeed worth buying a life insurance plan, whether in the short or long term. This piece is dedicated to understanding all the advantages and disadvantages of a life insurance plan to help you decide which side is the more suitable one for you.

Life Insurance Policies Pros & Cons – An Overview

Before we start digging deep, let’s have an overview of the life insurance investment pros and cons.

Advantages

Limitations

Offers Financial Protection – Death Benefit

May Not Pay Out Under Certain Circumstances

Cheap Enough to Fit Your Budget

Unhealthy Policyholder = Expensive Policy

Helps Clear Debts

No Benefits of Outliving the Policy

Investment & Savings Component

Uncertain/Negative Returns & Charges

Borrowing Against the Policy

Lack of Flexibility

Peace of Mind

Cash Value Takes Long Time to Build Up

Pros of Life Insurance Policies 

This section will elaborate on the advantages of life insurance plans as an investment as listed in the above table. Follow through to dig deeper:

Offers Financial Protection – Death Benefit

The biggest benefit or advantage of having a life insurance policy is the exceptional financial security offered to your family. While you may not directly benefit from your life insurance plan, your family or the dependents will get a significant amount of help with a proper life insurance policy in place.

This becomes even more essential if you are the only breadwinner in your family. And even if you are one of the breadwinners in the family, your life insurance plan can still mean extra support for your dependents. With an adequate life insurance plan, individuals can be assured that their families will be well taken care of in case of their untimely death.

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Cheap Enough to Fit Your Budget

Most life insurance plans out there are affordable to the extent of easily fitting your monthly or yearly budget. You can build a life fund slowly over the years without feeling any impact on your budget. You can always adjust the assured sum of the life insurance plan you plan to get to make the premium payments fit your budget.

Additionally, there are several types of life insurance plans that you can choose from to find the one that fits your requirements. Thus, if you need a limited time cover for your family that is also easy on the pocket, term life insurance plans can be suitable for your requirements

Helps Clear Debts

A special type of life insurance is designed specifically to help an individual’s family in case they leave massive debts for them to settle after their untimely death. These plans are known as life mortgage insurance plans and are generally available for long term loans like home loans.

A life mortgage insurance plan pays off your remaining debt amount if you meet your demise without completely repaying it. While your family does not receive any death benefits with these life insurance plans, they can certainly save a fortune by having their remaining debt resolved.

Investment & Savings Component

Several life insurance plans come with an investment and savings component attached to them. Whole life insurance plans and unit-linked life insurance plans are two major types of such life insurance plans. The premium you pay here is divided into two parts – one is used to build the corpus of your life insurance plan, while the other one gets contributed to a savings account or for investment.

Unit-linked insurance plans are the ones that offer investment options while several whole life insurance plans offer the savings option. You can draw your earnings from the investments whenever you see fit or as per the specific terms of your plan. Moreover, you can also arrange for a periodic payout for your investment returns. As far as the savings account component is concerned, you can withdraw that amount when you retire and use it as a retirement fund.

Borrowing Against the Policy

If you ever find yourself in a financial predicament, you can rely on your life insurance plans for assistance. Most insurance providers offer the service of drawing a loan against your life insurance plan or the cash value of the plan. This loan amount can be utilised to resolve your financial requirements and repay the amount with a decent interest rate.

However, it should be kept in mind that not all insurance providers offer this benefit and the ones that do may have variating policies for it. Consequently, make sure that you check with your insurance provider beforehand about the loan policies of your permanent or whole life insurance plan.

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Peace of Mind

Last but not least, having a life insurance plan to protect the interests of your loved ones brings you invaluable peace of mind. While the death of a family member brings immense sadness to the family, your life insurance plan will serve as a protective umbrella that provides them with the financial support they require in your absence.

Limitations of Life Insurance Policies

Since life insurance policies, or any type of insurance policies, offer circumstantial benefits, a few limitations are bound to slip in with all the advantages. Let’s look at the limitations that a life insurance plan may bring to the table:

May Not Pay Out

Life insurance plans are boons for your dependents in case of your untimely death, as they offer the required financial assistance to fulfil their fundamental requirements. However, this is applicable only if the insurance pays out. The thing about any kind of insurance plan is that it comes with a set of inclusions as well as exclusions. Here, it means that the death of the policyholder is only covered if it happens in a few certain ways.

Generally, natural deaths are covered as a part of most life insurance covers. However, accidental deaths, death by suicide, diagnosis of a terminal disease, and a few other such cases are not covered. Consequently, depending on the terms of your chosen plan, the policy may not pay out as the cause of death was not covered.

Unhealthy Policyholder = Expensive Policy

While most term life insurance plans are pocket-friendly, a few factors may influence their premium. One such prominent factor is your health. People who are generally unhealthy or have serious health conditions end up getting highly expensive life insurance plans. In addition to that, the later you buy your life insurance plan in your life, the higher premium you will get as an older body is more prone to falling ill. Thus, getting a low-cost life insurance plan is only possible if you buy your policy early and maintain proper health.

Outliving the Policy

One of the biggest concerns when it comes to buying a life insurance plan is this – what if you outlive your life insurance? This is especially crucial when it comes to term life insurance plans. Term life insurance plans are valid for a maximum of 30-35 years at a time. They are generally designed to protect the financial interest of your family for as long as you are the breadwinner. Consequently, once you retire, the term insurance plans also meet their maturity. Here, your family only gets the death benefit if you meet your demise within the term of the plan.

As far as whole life insurance plans are concerned, the concept is that they are available for your whole life. However, even these plans have an expiration date set. Most whole life insurance plans, for instance, only cover you till the age of 99. In such cases, the policy stands expired after you touch 100, which is indeed a life accomplishment but spells ‘no pay out’ for your life insurance plan.

Uncertain/Negative Returns & Charges

The investment ventures that your provider will choose for your unit-linked insurance plan will generally be medium-risk ventures. However, a particular level of uncertainty is always a part of the investment. So even if you will be paying a certain amount towards the investment fund of your life insurance plan, there is no guarantee that what you will receive will match the anticipated amount. Notably, there is even a chance of earning losses rather than profit in these scenarios.

As far as the savings account option of life insurance plans is concerned, hefty fees and charges make the returns earned on your savings reduce to almost negligible. While most providers will offer a ‘promised interest rate’ or a guaranteed return rate, the actual returns you get in these situations can be considerably less than expected.

Lack of Flexibility

The uncertain nature of life reflects in terms of money as well. While you may be doing great in terms of finances today, tomorrow may turn out abysmal in terms of money. However, irrespective of the situation of your life or finances, you will be required to pay your life insurance premium if you want to keep the policy active.

If you fail to pay the premium, the insurance provider can cut it from your cash deposit or savings account in case of permanent life insurance plans. Thus, if you don’t have enough balance in your cash deposit account, you will end up losing the plan. Generally, there is a lack of flexibility with these plans when it comes to the premium payment.

Cash Value Takes a Lot of Time to Build Up

Even if your life insurance plan offers a savings account component from the beginning of the policy, it will take you a substantial amount of time to build up a good corpus in this deposit. The interest you earn on your deposit could be next to nothing due to the high fees and charges applied by the insurance companies. There is a high chance that you can earn negative returns in the initial years of your policy due to the high fees levied.

How Can You Get the Best Value Out of Your Life Insurance Plan?

Balancing life insurance investment pros and cons might not be an easy task but there are certain ways to mould your life insurance policy to reap the best value for your money. Mentioned below are three tips to help you manage your investments in life plans:

Buy Your Coverage Early

As mentioned before once, buying your life insurance plan early is the sure-shot way to score lower premiums. As your health is at its peak when you are young, you get to score additional discounts as well. Getting a life insurance plan when you are in your 20s may be fruitful if you expect to have dependents when you are in your thirties.

Be Truthful About Your Health

Contestability period in life insurance plans is a term used to describe the initial two years after you submit your application for a life insurance plan. The provider takes this time and builds up your case. Your information is verified to see whether you have been truthful about your health. You can use this period to declare all your health conditions and life habits that may worsen your health available to the provider.

If the provider discovers that you lied on your application or hid facts to pay lower premiums, your policy will most probably be cancelled and all the premiums you have paid so far will go to waste. Thus, it is highly recommended to always be truthful about your health and habits.

Only Buy Necessary Cover and Then Invest

Investment is a great way to grow your money without actively working on increasing the capital. You can buy the necessary life insurance coverage and invest the rest of the money in a good investment venture or an investment plan. Investment ventures like stocks yield higher returns but are highly volatile. However, investment plans are less risky and can provide you with decent returns as well. You will pay far fewer fees and charges compared to life insurance investment plans.

In a Nutshell

As life insurance plans deal with uncertainties, you are bound to come across a few life insurance investment pros and cons along the way. However, this is true for most things in our life as we can never certainly predict whether an action will prove fruitful or disastrous. You can, thus, easily turn the odds in your favour by keeping certain precautions.

To ensure that your hard-earned money is not spent in vain with a life insurance investment plan, research a bit to find a plan best fit. You can also separate the life insurance plan and the investment component altogether. Moreover, if you are more comfortable with a provider managing your investment portfolio, you can opt for that. Finally, you can take assistance from our experts at policybazaar.ae to enhance your understanding of insurance and the overall market.

Whichever path you tread, balancing life insurance investment pros and cons is the best way to maximise your gains while ensuring financial safety for your family.