How To Buy Life Insurance Essay

Why buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways:

Income replacement

For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income. This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.

Pay outstanding debts and long-term obligations

Consider life insurance

For example:

The cash value can be taken out either by withdrawing or borrowing. You may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or the borrowed amount will be deducted from the death benefit, which goes to your beneficiaries. Because this method of withdrawal is considered a loan, it is an income tax-free transaction.

The cash value accumulates on a tax-deferred basis.

The cash value is a personal asset and is reflected on your balance sheet.

You may cancel or "surrender" the policy -- in total or in part -- and receive the cash value as a lump sum of money. If you surrender your policy in the early years, however, there may be little or no cash value.

If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified period of time or to provide a lesser amount of protection to cover you for as long as you

Once a policy is taken out, people usually pay the premiums rather than deprive their family of the protection the policy provides. Paying the premiums means making regular contributions to the savings element of the contract.

Permanent Disadvantages

Commitment - "Until death do you part." Like marriage, permanent insurance is designed to be a life long commitment. You can always cancel or surrender the policy, but most contracts have hefty surrender penalties if you decide get out before the surrender period expires, which is usually more than 10 years and less than 20. In addition, at the time the policy is surrendered, the excess of the cash surrender value over the premiums paid is taxable as ordinary income.

Charges & Fees - Since you are also buying life insurance, it is reasonable to assume a good chunk of the cash deposited in a permanent plan will go towards the cost of the insurance.

Limited Investment Choices - Term life is pure insurance and is initially much less expensive than permanent insurance. You could take the savings provided by purchasing term and invest it in any vehicle you like. Permanent plans, on the other hand, require you invest in the investment vehicles provided in the