Insurance

How to Choose the Right Life Insurance Policy

CleverDude_InterviewPicTraditionally, most people initially purchase life insurance to cover final expenses and see that survivors receive cash benefits after a loved one passes away. However, depending upon the type of policy that you buy, you may have more options. A few policies are strictly designed to pay death benefits and others also include cash value options, which provide more choices and greater flexibility.

Types of Coverage

There are a few types of policies for life insurance, but the two most common types are term and whole life, which is sometimes referred to as permanent.

1. Term Insurance

Term policies are popular with many folks because they provide a basic insurance policy, which only covers death benefits. It is also quite a bit cheaper to buy than other varieties of insurance.

The coverage is purchased for a term, which may run from just a year to a 10 year term. Terms can be renewed when necessary. However, term coverage does not generate cash value at all. This can be an ideal coverage for those wishing to cover some of their final expenses for things like funeral expenses, burial costs or a mortgage.

2. Whole Life Insurance

Compared to term coverage, whole life policies cost more. However, besides receiving your death benefit, insurers also accrue cash value. Cash value policies can open the doors for those in need of quick cash, especially for emergencies.

How to Borrow From Your Life Insurance Policy

Once you’ve accumulated enough money in your death benefits account, you are allowed to borrow against your collateral (cash value) you have accumulated. Your cash remains in the account and it’s almost like having your own savings.

Unlike applying for bank loans where you go through a long drawn out procedure, you simply fill out a form with the insurance carrier to request a loan against your policy.

Depending upon the response time of your carrier, you may receive your loan money within 5 to 10 business days.

Considerations for Borrowing

Pros

• No credit checks, income verification or deposits are required.

• It’s possible, in some instances, to receive a loan as high as 95 percent of the policy cash value.

• Loan amounts don’t have to be repaid.

• As the insured, it is up to you to determine a repayment schedule if desired, which can also be changed or modified in the future.

• After receiving a loan, cash values will continue to earn dividends and grow.

• For the most part, loans of this nature that use cash value for collateral are tax free except for some rare exceptions.

Cons

• Loans may reduce the cash amount you have available for your beneficiaries unless you work at repaying the loan.

• By taking out a loan based on your policy, you may have less money available to you in the future if an emergency should occur.

• Each insurance carrier may have set limits on the amount of a loan you can take out.

• These loans require you to pay interest just like any other type of loan. In many cases, rates are usually lower than credit cards or bank loans.

You may need to contact your insurer to determine how much money is available in your account, and it’s a smart idea to contact a financial adviser to be sure you won’t be facing tax concerns.

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James

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