term life insurance http://www.wisebread.com/taxonomy/term/8844/all en-US Should Life Insurance Be Purchased as an Investment? http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/should-life-insurance-be-purchased-as-an-investment" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/2655701444_75871f8755_z.jpg" alt="rainbow umbrella" title="rainbow umbrella" class="imagecache imagecache-250w" width="250" height="159" /></a> </div> </div> </div> <p>Before purchasing life insurance as an investment, a potential investor should understand a few things about the types of life insurance and how they work. &nbsp;Basic life insurance can be broken down into two major categories, <strong>term insurance</strong> and <strong>whole life insurance</strong>. (See also: <a href="http://www.wisebread.com/financial-iq-test-how-healthy-is-your-life-insurance-plan" title="How Healthy is Your Life Insurance Plan?">How Healthy is Your Life Insurance Plan?</a>)</p> <p><strong>Term insurance</strong> is insurance for which one makes annual premium payments in exchange for a death benefit. This is the least expensive type of life insurance and cannot be purchased as an investment. The death benefit is all that one receives from term life insurance, provided one passes away while the policy is active.</p> <p>This type of insurance is ideal if you do not believe you will need life insurance in your later years; the older one becomes, the higher the premiums for term life insurance. The primary purpose of term life insurance is to protect those people who depend on you; as one gets older, most people accumulate <a href="http://www.wisebread.com/how-to-tell-if-youre-on-track-for-retirement" title="How to Tell if You're on Track for Retirement">retirement savings</a> and/or their children become self sufficient, decreasing the need for term life insurance.</p> <p><strong>Whole life insurance</strong>, also known as <a href="http://www.doughroller.net/insurance/life-insurance/should-you-consider-permanent-life-insurance/">permanent or cash value life insurance</a> is the second type of life insurance and can be broken down into whole life, universal life, variable life, and variable universal. In general, cash value life insurance offers protection throughout one's entire life, and also includes an investment &mdash; the cash value. Only a portion of the premium payments on a cash value life insurance policy cover the actual insurance. With the other portion of the premium, the insurance company sets up an investment known as an accumulation account which is invested in interest-bearing securities.</p> <p>The cash value reduces the amount at risk to the insurance company and thus, the insurance expense over time. The owner can access the money in the cash value through policy loans or other options which reduce the death benefit. Accordingly, premiums for such policies generally tend to be higher than those associated with term life insurance, at least in the earlier years.</p> <p>The appeal of whole life insurance as an investment stems from the tax treatment of its accumulation account. The money in the accumulation account grows tax deferred, meaning taxes are postponed on income and capital gains. Nevertheless, there are many factors that make this type of insurance an unattractive investment option:</p> <ol> <li>There are incredibly high fees and expenses associated with buying permanent life insurance. Unless one buys a no- or low-load insurance policy, the fees and expenses erode the returns so much that it is almost impossible to compete with the returns of securities such as mutual funds. These fees and expenses are so high that they can eventually outweigh the tax deferral benefits of such policies.<br /> &nbsp;</li> <li>Further, the insurance companies generally provide unrealistic policy illustrations to show potential clients what their premiums and cash value will be in the future by using unreasonable interest rate forecasts. From a purely financial sense, many insurance experts suggest buying a term life insurance policy and investing the difference in premiums between the plans on your own.<br /> &nbsp;</li> <li>Finally, with cash value life insurance, the only benefit paid to your family upon death is the face value of the policy.</li> </ol> <p>Based on this evidence, it is quite apparent that permanent or cash value life insurance is not a recommended investment. Individuals with access to other tax-deferred retirement savings opportunities, such as a 401(k) or a <a href="http://www.doughroller.net/investing/ira-online-discount-brokers/">ROTH IRA</a>, should be maximizing their contributions rather than investing in a cash value insurance policy.</p> <h3>Sources</h3> <ul> <li><a href="http://findarticles.com/p/articles/mi_m1563/is_n6_v12/ai_15508219/pg_2/?tag=content;col1">Life insurance, an investment? Despite what you hear, it's rarely a good choice</a> (BNET)</li> <li><a href="http://www.finweb.com/investing/should-you-use-life-insurance-as-an-investment.html">Should you use Life Insurance as an Investment?</a> (Financial Web)</li> <li><a href="http://www.daveramsey.com/article/the-truth-about-life-insurance/">The Truth About Life Insurance</a> (Dave Ramsey)</li> </ul> <div class="field field-type-text field-field-guestpost-blurb"> <div class="field-label">Guest Post Blurb:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <p>This is a guest post by Michael Pruser. Michael is the managing editor of the popular personal finance blog, <a href="http://www.doughroller.net/">The Dough Roller</a>, and also writes for the credit card review sites, <a href="http://creditcardoffersiq.com/">Credit Card Offers IQ</a> and <a href="http://www.prepaidcards123.com/">Prepaid Cards 123</a>.</p> </div> </div> </div> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/michael-pruser">Michael Pruser</a> of <a href="http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Did Your Parents Give You a Whole Life Insurance Policy? Here&#039;s What to Do With It.</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-your-group-life-insurance-is-not-enough">Why Your Group Life Insurance Is Not Enough</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-questions-financial-advisers-hear-most-often">8 Questions Financial Advisers Hear Most Often</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-reasons-why-life-insurance-isnt-just-for-old-people">5 Reasons Why Life Insurance Isn&#039;t Just for Old People</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Insurance Investment life insurance term life insurance whole life insurance Wed, 27 Oct 2010 14:00:07 +0000 Michael Pruser 272321 at http://www.wisebread.com Universal Life Insurance and Whole Life Insurance: A Comparison http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/universal-life-insurance-and-whole-life-insurance-a-comparison" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/IMG_0857_1.JPG" alt="life insurance" title="life insurance" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p class="MsoNormal">So you think you need life insurance, or you know it is time to review the insurance coverage you currently have (which is something you do every few years, right? Right).</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">You may already have a Universal Life insurance or Whole Life insurance policy, or you may have an insurance agent or <a target="_blank" href="http://www.wisebread.com/9-signs-you-need-to-fire-your-financial-planner">financial planner</a> in front of you telling you that you need one.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Read on for a comprehensive look at both forms of insurance, with pros, cons, and example applications for each.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Universal Life (UL)</strong> and <strong>Whole Life (WL)</strong> are both forms of permanent insurance. <strong>If you are in doubt as to whether you are in the market for permanent insurance or term insurance, check out </strong><a target="_blank" href="http://www.wisebread.com/how-and-why-to-buy-life-insurance"><strong>this article</strong></a><strong> first.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><em>Please note that there is a large contingent of people who believe only in Term life Insurance. I will not argue the idea that Term Insurance is more often than not a cheaper and better life insurance product for most people. There are, however, times when permanent insurance may be a better choice. This article will help you determine if you are a good candidate for permanent insurance.</em></p> <p class="MsoNormal"><o:p><strong>&nbsp;</strong></o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>Permanent Insurance Primer &ndash; Insurance Part</strong></h3> <ul> <li>Both UL and WL policies <strong>combine a permanent life insurance component with an investment component.</strong></li> <li>The<strong> life insurance</strong> component (investment component aside) <strong>is good for life</strong>, and the price doesn&rsquo;t increase over time.</li> <li>Because of the level premiums for the insurance component, the cost of insurance will be higher than an equivalent amount of Term (temporary) insurance. Over the life of the policy though, the permanent coverage (again, aside from the investment component) <strong>ends up being cheaper overall (in comparison to the cost of renewing a Term10 policy for life).</strong></li> <li>You <strong>don&rsquo;t choose permanent insurance to have a whole heap of life insurance coverage for needs that are ultimately temporary.</strong> For example, don&rsquo;t cover off your mortgage or kids&rsquo; education with permanent insurance, since these will eventually be paid off. Instead, look at issues like estate taxes and leaving a legacy in determining the amount of insurance coverage to get.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>Permanent Insurance Primer &ndash; Investment Part</strong></h3> <ul> <li><strong>The investment component of both UL and WL grows on a tax-deferred basis</strong>. This allows for some good compounding of returns and accelerated growth over time. Permanent insurance is best bought with a <a target="_blank" href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">very long time frame</a> in mind.</li> <li><strong>There are limits to the tax-deferred growth</strong>. By purchasing &ldquo;x&rdquo; amount of life insurance, you are allowed to shelter a corresponding amount of investments from taxation. The formula for this is complicated, but the more insurance you buy, the more money you can shelter in the investment component.</li> <li><strong>Making a straight withdrawal from the investments in a UL or WL policy will subject you to taxation on all the growth.</strong> It is treated as income and taxed at marginal tax rates. The money you put in (the principal) is not taxable, since it is after-tax dollars to begin with.</li> <li><strong>If you borrow against the investment component of the policy, you can receive the investments (growth included) tax-free.</strong> You don&rsquo;t need to make loan payments as the interest is accrued to the policy. The total loan amount (including interest) is paid to the bank after you die, with the remainder of the investment component, along with the life insurance component, going to your beneficiaries. Tax-free, of course.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHOLE LIFE</strong></h3> <p class="MsoNormal">Whole Life insurance is very difficult to get a full grasp on. There are a myriad of options and sub-options that can be selected, depending on your age and health, what you want the insurance for, your cash flow, intended premium payments, and the insurance company in question. It is best to consult with a knowledgeable insurance broker who can shop across the market for you if you want (or have) WL insurance.</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Here are the basics:</strong></p> <ul> <li><strong>You pay set premiums for a pre-determined amount of time (like 20 years).</strong> These premium amounts are rarely flexible, especially in the initial years of the policy, when most of the premium goes to the life insurance component with very little going into the investment component.</li> <li><strong>Each year, the insurance company pays out &ldquo;dividends&rdquo;,</strong> which are allocated to either your investment component or to purchase further insurance. The more insurance and investments you have, the higher your dividends will be.</li> <li><strong>The dividend options vary widely across policies and insurance companies.</strong> You can choose for the dividends to purchase extra term insurance, extra permanent insurance, or have it go directly into the investment component. Combinations thereof also apply.</li> <li>Eventually <strong>once the dividend payments are large enough, you can choose to have them pay for the cost of the insurance.</strong> This is how you can have a permanent insurance product like WL and not have to pay premiums at all after 20 or so years.</li> <li><strong>You have little to no say in how the investment component is invested.</strong> You cannot, for example, choose to put it in US Equities or International Bonds. You will be provided with projections as to how the investment component will grow over time. Most of it is interest-based growth. (All dividends and growth are tax-free as long as they remain in the policy).</li> <li><strong>The larger your investment component, the larger your dividend payments are.</strong> So as time goes by and your investments grow, your dividend payments will also grow. This is why WL is best purchased with a long time frame in mind; <strong>it doesn&rsquo;t become really viable until it has been in effect for many years, at which point it can grow fantastically.</strong></li> <li>After time you can use options like dividend offset, premium holiday, and policy loans to stop paying life insurance premiums out of pocket, and access some of the money in the investment component if you wish.</li> <li><strong>When you die, the full amount of the investment component plus the insurance component is paid to your beneficiaries &ndash; tax free.</strong></li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>UNIVERSAL LIFE</strong></h3> <p class="MsoNormal"><strong>Universal Life Insurance a newer, more flexible version of Whole Life.</strong> It is also considerably easier to understand, and is generally preferred to Whole Life for these reasons.</p> <ul> <li>Although you would get a UL policy with the intention of paying a set amount of premiums for a pre-determined amount of time, these <strong>payments are very flexible</strong>. You must maintain the cost of the life insurance, and then you can contribute as much or as little as you wish to the investment component (subject to certain upper limits for tax-free sheltering).</li> <li><strong>You can choose how the investment component is invested</strong>, within the insurance company&rsquo;s available options. Insurance companies will often pair up with investment firms to offer <a target="_blank" href="http://www.wisebread.com/mutual-funds-for-wise-bloggers">mutual fund </a>types of investments specifically for UL policies. So although you cannot choose specific stocks or individual bonds, you can invest in certain <a target="_blank" href="http://www.wisebread.com/asset-allocation-for-all-markets">asset classes</a> according to your investment profile and desired performance.</li> <li>Once there is an accumulated balance in the investment component, <strong>you can choose to have the life insurance premiums paid from the investments</strong> so you do not have to pay further premiums out of pocket after time.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHY CHOOSE UNIVERSAL LIFE?</strong></h3> <p class="MsoNormal">As an investment, <strong>Universal Life is best used for people who have large (but undetermined) amounts of money they wish to invest with an eye to shelter the growth from taxation.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #1:</strong></p> <p class="MsoNormal">An ideal candidate for Universal Life as an investment could be a <strong>single or couple in their 50s, whose income is high and expenses are low</strong> (ie: the mortgage is paid off, and the kids are out of school). This couple could choose to invest $10,000 per year, for the next 5-10 years, for example. This would be an easy reach for this candidate, since they are used to allocating much more than that towards housing and children &ndash; expenses they no longer bear.</p> <ul> <li>The money will be allocated partially to &ldquo;x&rdquo; amount of permanent insurance, which will be a legacy for their kids, or will be earmarked to pay for estate taxes on death. (The policy would likely be structured to buy the minimum amount of life insurance required to shelter the maximum amount of their intended premiums in the investment component).</li> <li>The rest of the premiums will go into the investment component, which will be invested as per their instructions and will grow on a tax-deferred basis. Please note that if the investment of choice is a market-based investment, it can decline in value like any other market-based investment.</li> <li>In retirement, when the parents would like to supplement their retirement income (tax-free, of course), they can arrange for policy loans, borrowing against the investment value. The money is paid out without taxation (since loans aren&rsquo;t taxable), interest is accrued to the policy, and when they die the loan amount plus interest is paid to the bank out of the investment component, and the remainder of the investments plus the insurance is paid to the beneficiaries (tax free).</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #2:</strong></p> <p class="MsoNormal"><strong>A professional single or couple in their 30s or 40s with some disposable income</strong> can use a UL policy for long-term tax-deferred growth.</p> <ul> <li>Unlike Candidate #1, this candidate would invest a much smaller amount of money each year for a longer period of time. Most of the premiums would pay for the insurance component, with any extra money going towards the investment component.</li> <li>These payments would likely last through most of the candidate&rsquo;s working career.</li> <li>By the time they reach retirement, a nice nest egg would be set up in the investment component, which has compounded tax-free. Like Candidate #1, they can then use these investments to offset the cost of the insurance, as well as to supplement their retirement income in the form of policy loans.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <h3><strong>WHY CHOOSE WHOLE LIFE?</strong></h3> <p class="MsoNormal">With less flexibility around the choice of investments and annual premium amounts, <strong>Whole Life is ideal for somebody who knows they can pay and maintain a set premium amount for many years</strong>. Somebody who cites themselves as lacking discipline to invest might choose WL because of this inflexibility (thus using it as a forced savings plan of sorts).</p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #1:</strong></p> <p class="MsoNormal">Although there is a good argument for UL even in this case, <strong>one of the most common uses for WL is when parents </strong><a target="_blank" href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it"><strong>purchase it for their children</strong></a><strong>.</strong></p> <ul> <li>Mom and Dad purchase a WL policy on the life of their child while still a baby, and the cost of insurance is teensy.</li> <li>The moderate premiums (eg: $30-$50/month) are easy to swallow, and maintained for the next 20-30 years.</li> <li>When the child is old enough, the policy becomes theirs. Ideally by this point there are few if any premiums for the child to carry on paying, as the annual dividends can more than cover off the insurance premiums, with the remainder continuing to be invested and growing tax-free.</li> <li>The child can use the investment component as a retirement nest egg, for a major purchase, or simply keep it all as paid-up (and ever-growing) life insurance.</li> </ul> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><strong>Ideal Candidate #2:</strong></p> <p class="MsoNormal">Not dissimilar to Ideal Candidate #2 for UL, <strong>a young professional with a reliable long-standing disposable income and a need for basic life insurance</strong> may choose WL as their insurance investment. Because of the stricter premium structure, <strong>somebody without much discipline looking for a forced savings plan might see WL as being a good idea.</strong></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><em><strong>Truly though, Whole Life is an antiquated and confusing type of permanent life insurance, and there is little reason to choose it over Universal Life. With an easy to understand structure and more flexibility all around, Universal Life is generally the permanent life insurance product of choice.</strong></em></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/universal-life-insurance-and-whole-life-insurance-a-comparison">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-and-why-to-buy-life-insurance">How (and Why) to Buy Life Insurance</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-life-insurance-term-or-permanent">Choosing Life Insurance: Term or Permanent?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment">Should Life Insurance Be Purchased as an Investment?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-celebrities-with-shockingly-low-net-worths">6 Celebrities With Shockingly Low Net Worths</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/boost-your-savings-by-making-your-money-harder-to-spend">Boost Your Savings by Making Your Money Harder to Spend</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance permanent insurance term life insurance universal life insurance whole life insurance Wed, 15 Apr 2009 05:26:35 +0000 Nora Dunn 3048 at http://www.wisebread.com Why You Don’t Need Mortgage Life Insurance http://www.wisebread.com/why-you-don-t-need-mortgage-life-insurance <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-you-don-t-need-mortgage-life-insurance" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/why you don.jpg" alt="hidden sunrise" title="hidden sunrise" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p class="MsoPlainText">When you signed for your mortgage, you were offered mortgage life insurance for mere pennies a day. If you chose to decline it, you had to sign all sorts of liability forms declining said insurance, which no doubt made you second-guess your decision, and possibly change it.</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">There are several reasons why declining the bank-offered insurance is advisable<strong> in favor of an individual life insurance policy</strong>:</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">When you signed for your mortgage, you were offered mortgage life insurance for mere pennies a day. If you chose to decline it, you had to sign all sorts of liability forms declining said insurance, which no doubt made you second-guess your decision, and possibly change it.</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">There are several reasons why declining the bank-offered insurance is advisable<strong> in favor of an individual life insurance policy</strong>:</p> <p class="MsoPlainText">&nbsp;</p> <h2>Mortgage Life Insurance Insures the Bank, not You</h2> <p class="MsoPlainText">Okay, so your life is in the lurch, but your family doesn&rsquo;t actually see any of the life insurance proceeds should you die. The bank is the beneficiary of the policy. So the good news is that your estate is absolved of its mortgage liability when you die. But the bank is truly the winner here &ndash; they get their money. And for this, you get to pay the monthly premiums.</p> <p class="MsoPlainText"><em><strong>Individual Policy:</strong></em> If you had higher interest credit card debt for example, your family could choose to pay that off instead and carry the mortgage. Choices abound with an individual policy.</p> <p class="MsoPlainText">&nbsp;</p> <h2>Mortgage Life Insurance is a Decreasing Benefit with Level Premiums</h2> <p class="MsoPlainText">Mortgage life insurance pays off the balance of your mortgage. And if you are paying it off responsibly, that amount will decrease as the years go by. However your premiums remain the same. Some would argue that this is accounted for in calculating the premiums, however I have sifted through many quotes and illustrations, and not found this to be the case.</p> <p class="MsoPlainText"><em><strong>Individual Policy:</strong></em> Standard term life insurance will offer a level benefit for the term. You pay &ldquo;<em>x</em>&rdquo; dollars a month, and if you die your beneficiaries will receive &ldquo;<em>x</em>&rdquo; dollars. Period.</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">&nbsp;</p> <h2>Changing Mortgage Lenders Means New Underwriting</h2> <p class="MsoPlainText">At the end of your five year term (for example), you decide to <a href="http://www.wisebread.com/redir/mortgagerates">switch your mortgage to another bank offering better rates</a>. However if you want the life insurance option, you will have to succumb to the medical questionnaire and underwriting process again. If something has happened to affect your insurability during this time, you could well be declined.</p> <p class="MsoPlainText"><em><strong>Individual Policy:</strong></em> Most term life insurance has a renewability clause. Under the terms, you have the option of renewing the insurance at the end of the specified term (eg: 10 years), but at significantly higher rates. The premise of this is that you are guaranteed to be insurable (until age 65 or 75 for example), but will pay increasing rates at each renewal. If instead you reapplied at the end of the term for a new policy and are healthy, you would get much lower rates. But if something had indeed happened to you to affect your insurability, with the renewable clause at least you still have some coverage.</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">You may say &ldquo;oh, but <em>xyz well-known insurance company</em> is offering the insurance through the bank &ndash; it&rsquo;s not just bank insurance, it&rsquo;s an individual policy. I get paperwork and everything&rdquo;.</p> <p class="MsoPlainText">Although &lsquo;<em>xyz insurance</em>&rsquo; is underwriting the policy, and although you know they offer individual policies , if you sign for it through the bank it is still mortgage life insurance. The issue here is not the insurance company; it&rsquo;s the product. Don&rsquo;t be fooled into thinking that your mortgage life insurance policy is a suitable substitute for your own individual life insurance policy. Do a proper needs analysis (preferably with your <a target="_blank" href="/how-to-choose-a-financial-planner-yes-you">financial planner</a>), and cover off the exact amount of life insurance you truly require.</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText"><em>Disclosure: The author has no personal vested interest in either form of insurance. </em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/why-you-don-t-need-mortgage-life-insurance">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/real-estate-investing-is-cheaper-and-easier-than-you-think">Real Estate Investing Is Cheaper and Easier Than You Think</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/is-paying-off-your-mortgage-early-costing-you-money">Is Paying Off Your Mortgage Early Costing You Money?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-is-keeping-you-from-a-life-of-financial-independence">What is keeping you from a life of financial independence?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-only-5-rules-you-need-to-know-about-investing-in-real-estate">The Only 5 Rules You Need to Know About Investing in Real Estate</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/is-real-estate-a-good-investment">Is Real Estate a Good Investment?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Real Estate and Housing bank insurance mortgage life insurance term life insurance Wed, 27 Feb 2008 20:56:41 +0000 Nora Dunn 1857 at http://www.wisebread.com