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Which
is best for you? The subject of insurance can be a confusing one;
the myriad of options and possibilities are staggering. But, before you
can answer these often asked questions: How much do I need? How much will
it cost? Will my beneficiaries have enough to live comfortably? - start
with the basics. Do you need cash-value or term insurance?
Cash-value
policies extend the possibilities. Cash-value life insurance, such
as universal and whole life, combines a death benefit and a tax-deferred
savings element. Occasionally referred to as permanent life insurance,
this type of policy is intended to cover you for your lifetime.
Annual
premiums for cash-value policies generally are higher initially than those
of term policies. This is because part of each premium pays for insurance
and the remainder is invested to build cash value. Cash value is what
you can borrow from the policy or receive by surrendering it. The amount
can build through professional investment management over the life of
the policy. These funds are ideal for retirement planning because they
accumulate tax-deferred until you withdraw them. Loans and withdrawals
will reduce the policies cash value and death benefit and may increase
the chances that the policy will lapse.
Term
insurance made easy. Term insurance is the most fundamental type of
life insurance. You purchase coverage for a designated period, from one
to several years, and the policy will provide a death benefit if you die
during that period. Many policies let you renew your coverage for repeated
terms until age 65 or 70.
Term
insurance is popular with younger people because it provides the maximum
amount of coverage for the lowest cost. Early premiums are normally relatively
low, but they increase considerably as you become older. For example,
a $250,000 death benefit might cost less in your 30s than it will in your
50s. For this reason, term life insurance is usually a better value for
shorter-term insurance needs.
The
decision is yours. Which type of policy is best for you? The answer
depends on several factors, including:
Your
needs. If you need coverage only until your teenage children graduate
from college, for example, you might be better off with a term policy.
Of course, you may want to purchase a cash-value policy and later surrender
it. However, surrender charges might apply if you cancel the cash-value
policy too soon (these charges decrease over time and eventually vanish).
Cash-value insurance is better suited for long-term needs, such as planning
for estate taxes and providing lifetime security for your spouse. Some
term policies cannot be renewed past age 70 and can become costly to renew
as you approach that age.
The
cost. If term insurance is more suited to your present expense plan and
you want lifetime coverage, consider a term policy which may be converted
into a cash-value policy. Then you can convert the policy whenever your
cash flow or needs dictate. You also could purchase a combination of the
two and gradually shift into cash-value insurance over time.
Your
savings and investment goals. Cash-value life insurance can be a good
long-term investment vehicle, especially because the cash value has the
potential to grow tax-deferred. Should you no longer need the insurance
but want some extra cash, you may surrender the policy and collect the
accumulated cash value. Be sure to discuss the tax consequences with your
tax advisor first.
As
an alternative, you could purchase term insurance and invest what you
save on premiums on your own. Compare the returns you can expect, and
remember to take taxes into consideration if you plan to select taxable
investments.
Spencer
Duggan is a Financial Consultant and a Towne Lake resident. Spencer offers
securities through AXA Advisors, LLC (Member NASD), SIPC) and annuity
and insurance products through an insurance general agency, AXA Network,
LLC and its subsidiaries. You can reach him at (678) 455-4844 or e-mail
him at Jonathan.Duggan@axa-advisors.com.
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