Paying off the monthly dues for an insurance policy felt unnecessary at times. However, its utmost importance as a lifeboat to the beneficiaries from drowning in financial woes comes handy in emergencies such as the policyholder’s untimely death. Later in this article, you would find out that insurances are way more than about death benefits.
If you could dive deeper into the possible long-term impact, getting a life insurance policy is more of a leverage than an additional expense. For a small cost in the form of “premium,” the insurance company will guarantee you a payout of a large amount of money.
Depending on your preferences and lifestyle, companies offer thousands of different life insurance plans to best suit you. However, all of these overwhelming options fall into two general categories of term and permanent insurance. Term insurance has benefits for a limited time, such as 10 years, 20 years, and so on. On the other hand, permanent insurance has benefits placed for life.
If you don’t have any insurance plan, we hope this article can help you decide which is the most beneficial to you. You can even learn how to enjoy the benefits while you’re still alive.
If you have a strict budget, then the term insurance could be your best buddy in times of need. This plan provides coverage at a fixed rate of payments that prolongs for a limited time. The cost for the premium will depend mostly on your overall health and age. It means the younger and healthier you are, the lesser your expense is.
The biggest downside of this plan though, is that many term insurance plan holders didn’t get the death benefits. About 90% of the holders either outlive the terms in the policies or stopped paying the premiums. In that case, you’re like giving away your money to the insurance companies. On the brighter side, this is also the reason for cheaper pricing.
Having the most benefits, permanent insurance comes at a high price. Many people also called it whole life insurance as the policy covers you until your last days. What’s excellent about permanent insurance is the assurance of getting the premium benefits such as the death benefits and cash values in a fixed amount.
This means that as long as you’re willing to pay, the insurance company will take all the risk. From the investment risk, the risk of dying, and inflation risks, the company will handle all of those. If you think you can afford this plan, then you can get the most out of it.
If you prefer to somehow get the benefits of permanent insurance while paying the price somewhat close to term insurance, then here’s the third type of insurance, the universal life insurance. In other words, it’s term insurance within the permanent insurance policy.
There are so many details to tackle this type of insurance. However, if you can agree with the insurance company for a plan specifically designed for you, then you will get the most value for your premium payment that will last for a lifetime. If not properly planned, then the UL could add more pain to your finances.
The bottom line is you should find a company that has you in their best interest.
As most people are familiar with life insurance, they thought they should die first to leave a legacy fund to their loved ones. Nowadays, many insurance policies are designed in a way that you can enjoy the benefits while you’re still alive.
Two from many of these so-called “living benefits” are the tax-free accumulation of investment earnings and zero-interest loans. You can use these advantages in case you need an emergency fund for your serious medical needs or a downpayment for your dream house.
Having these clever options, many people realized how they could utilize them in their lives. As already mentioned, the savings from tax-free investment and zero-interest loan gave you an emergency fund that named this strategy “Bank on Yourself.” Instead of going to the traditional banks or other loan providers, you simply borrow the money from yourself.
Having access to tax-exempted investments and zero-interest loans, you can also get another benefit. Thus, you can leverage the positive arbitrage as you can borrow money with a low-interest rate for another investment with a higher rate.
For example, if you borrowed S $ 100,000 for a 2% interest rate, that would cost you S $ 2,000 of annual interest. Then, you invested that S$100,000 loan to buy a house, including all the renovation costs. Later on, you successfully flipped the house to S$104,0000. After returning the borrowed money plus the 2% interest, you cashed out S$2,000. In short, because of the power of positive arbitrage, you make money from the insurance benefits.
However, if you borrow money with a higher interest rate than the investment, you will have a negative arbitrage. It’s like borrowing S $ 100,000 for a 5% annual interest rate, which amounted to S $ 5,000, then making an investment earning of only 4% equivalent to S $ 4,000. In that case, you lost S$1,000 as the loan value is greater than the investment outcome.
These above simple examples with computations show that many insurance policies are not always about premium payments, but also tools for additional profit. In the real world, many life insurance contracts include terms that start at a low-interest rate of 2%. Some companies will even allow you to borrow at 0% if you’re already a policyholder for 10 or 20 years. Interestingly, you make yourself the bank, as you can borrow money for free.
These 2% and 0% loan interest rates are fixed for life, which is either called “spread loan” or “wash loan.” It means you can borrow money according to the policy and you can’t earn any interest from it.
However, some companies use another strategy called participating loans. With this, you can still earn interest on your money inside the policy even after you borrowed it. If you borrow at a 5% interest rate, the company will continue to invest your money as if no money was subtracted to your accumulated fund.
For us, having all those options and strategies, a well-designed life insurance policy could be one of the best long-term financial products you can ever get.