Estate Planning: Choose the Right Insurance Policy as a Hedge of Protection
- Author: Kelly Cooke
- Posted: 2024-05-04
When you are ready to select your ideal life insurance, rest assured that you will have several options from which you can select. There are four main categories of life insurance policies:
- Term Life Insurance
- Return of Premium Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- How much life insurance coverage do I need?
- How much can I afford to pay in monthly premiums for coverage?
Term Life Insurance
You can easily buy a term life insurance policy. This policy is simple, inexpensive, and straightforward. For example, say, for instance, you spend $2,500 on annual premiums for a 30-year policy at face value of $400,000. After 30 years, you would have spent $75,000. You may still be alive after the 30 years. So, what you have really bought for the 30 years of coverage is peace of mind. Nonetheless, you will not receive any bonus payouts or return of premiums.
Return of Premium
You may want to consider the Return of Premium life insurance policy. It is very savvy life insurance. Once you have completed your policyholder application, say you spend $3,500 per year on a Return of Premium life insurance policy. After 30 years, you would have spent $105,000. Considering you are still alive, you would receive the entire $105,000 as a refund. Take note; your original investment will not include any interest payments since it is not an investment product. Also, the Return of Premium investment will not be adjusted for inflation.
Whole Life Insurance
Whole Life Insurance can be quite beneficial as it is designed to last a person's entire lifetime, past the 30 years for standard life insurance policies. In addition to paying out the defined death benefit, the policy accumulates cash value.
As you look at this policy, note that it is more expensive than Term Life Insurance. A portion of your monthly premiums will go into an investment account that will determine your cash value. When the policy matures, your cash value should be the same as your death benefit - generally at the age of 100.
Universal Life Insurance
Primarily permanent life insurance, Universal Life Insurance has a built-in savings component. As you make your monthly payments, a portion of your payments goes towards the insurance company's overhead and administrative costs, while the remainder is invested in the stock market.
You have the option to choose the maturity date for the Universal Life Insurance policy. The policy could mature at age 75, 90, or 100. With Universal Life Insurance, you have the choice to select three main options.
- Guaranteed Universal Life Insurance: Leveled insurance policy without the cash value.
- Variable Life Insurance: You can voluntarily choose your investment vehicles for your cash value.
- Index Universal Life Insurance: Your cash value grows as it is linked to the NASDAQ 100 and S&P 500.
Insurance Investment
You can do stock market investment calculations to determine which life insurance product would be most beneficial for you. For example, the Term Life Insurance policy is $2,500 per year and the Return of Premium life insurance is $4,000 per year. You would purchase the Term Life Insurance policy and invest the difference in premiums in the stock market for 30 years.
With an average of 6% interest, you would have $118,587.27 in your investment account. This would be less than the $120,000 you would receive for the Return of Premium life insurance after 30 years.
However, if the interest rate were 8%, it would be more beneficial to purchase the Return of Premium term life insurance. As you understand your life insurance options, remember to plan early, and include options in your will.
