Making Life Choices This 2018: What Is Traditional Life Insurance?
Believe it or not, insurance plans are for your peace of mind. Traditional life insurance, for example, ensures your loved ones remain financially secure or attain the financial goals you’ve set together even after you pass on.
All these questions are probably running through your head: How does traditional life insurance work? How does it benefit me or my beneficiaries ultimately? Are there potential pitfalls I should look into?
We’ll go over each of those items, including practical tips for buying traditional life insurance.
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How does traditional life insurance work?
This policy is also known as whole life insurance or sometimes just life insurance (not to be confused with term life).
Highlights of this type of insurance are:
- Provides coverage for the entire life of the policy owner, you for instance.
- Offers a guaranteed sum or a payout to your beneficiaries, e.g. loved ones or whoever you name in your policy, when you pass on.
- Builds cash every year. This serves as cash value of the policy.
- Requires premiums that level throughout the policy.
Premium, Cash Value, Death Benefit
With your traditional life insurance, your premium when you first took out the policy is the same until its maturity date. Age is still a factor but rates on whole insurance policies have been adjusted to take this into account.
Paying your premiums increases the cash value of your policy. The full amount may be received together with the guaranteed debt benefit, as applicable.
This cash value, however, can be used while the coverage is still running:
- You can borrow against this cash value when you run into emergencies and for other purposes. The loan will incur an interest and will have to be repaid. If the loan remains unpaid, it will be deducted from your death benefit.
- You can ask the insurer to use the cash value to cover your premiums.
- You can withdraw a portion of this cash value but your death benefit will decrease.
- You can relinquish your death benefit and thus your policy and take out the full cash value, subject to taxes.
Any decision you make regarding your cash value will have an effect on your death benefit so think carefully.
What are the perks, potential pitfalls of permanent life insurance?
A traditional life insurance goes on until you die, doing away with renewals every now and then. Its premiums also remain the same and the death benefit fixed.
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Speaking of death benefit, your beneficiaries will be able to receive it in full, tax-free.
Your policy is like your savings account, you can withdraw money from it when you need it.
More importantly, you are in full control of who to nominate as beneficiaries.
That being said, traditional life insurance is as straightforward as it can get. This makes it simpler to understand but inflexible when you take into account various financial possibilities.
Term life insurance has been made to provide more flexible terms and premiums with its varied plans.
It gives the same amount of coverage for a shorter period of time. Here’s the catch: when you die after the policy ends, your beneficiaries won’t receive any payout.
Buying Traditional Life Insurance
Life insurance is not one-size-fits-all. In making choices, consider your goals and needs.
What do you want to achieve in buying a life insurance policy? If it’s giving out a sizeable sum to your loved ones, a traditional life policy will suffice. If you are on the lookout for higher returns on investments, investment-linked insurance plans might be a better option.
How much can you spend? Anchor your choice on how long you’ll be needing the coverage. If it’s for a short term, then a shorter-term plan will probably work out. But if you are thinking for the long haul and can afford the higher premiums, traditional works best.
Where to shop for insurers? You can look up insurer reviews and ratings on the Internet. You can also ask insurance specialists to help you narrow down your search.
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