When deciding to invest in a life insurance policy, you have to take many factors into consideration. Many people consider finances to be the most important factor, which is why they commonly decide to go with a cheap life insurance policy. While cheap can be convenient, sometimes it can be a complete waste of money.
How do you know if you’ve made the right choice? Let’s see what the most inexpensive forms of life insurance are and if they are really worth your hard-earned money.
Term Life Insurance Policy
Term life insurance policy is probably as cheap as a life insurance policy can be. It has by far the most affordable premium payments and cost of insurance. Why is this so?
Term life insurance doesn’t have a cash value, and it usually expires before the insured passes away. How does it work? The term life insurance policy is active for several years. Insurance companies calculate the odds of the insured passing away during these years which dictates its cost. Since it is time-limited, its cost is significantly lower when compared to other life insurance policies.
So, is it worth your cash? It is definitely the cheapest option on the market, but when it comes to the expected rate of return, it’s on the bottom of the list. Consecutively buying term life insurance policies upon the expiration of the old ones, will, in the end, cost you more than investing in other life insurance options. Not to mention that the cost will exponentially go up as you age.
Whole Life Insurance Policy
A whole life insurance policy is considerably more expensive, but at the same time, the expected rate of return is also higher. The insurance company will charge you more for whole life insurance to ensure cash for future premiums. All the cash you give to the insurance company ends up as an investment. The insurance company opens an investment account in your name and invests this cash for you. In the end, the investment account is able to pay for the insurance, and the insured doesn’t have to pay annual fees.
Unlike a term life insurance policy, whole life can become self-sustaining and the expected rate of return can grow higher as well. From a financial perspective, a term life insurance policy is not an investment. On the other hand, whole life is because it works as a money-saving option for the insured.
Depending on the insurance company, you may be able to use dividends as you like. You can use them to pay the policy premiums or invest this cash as you see fit.
Universal life and variable universal life insurance policies can also appear affordable. But it is important to note the return rate of these policies and the cost of insurance depend on the market performance, timing of funding, and funding levels. This makes them the riskiest option on the market.
As you can see the
cheapest option is term life insurance, but it provides no long-term value. So,
should you invest in it? You should, but only if you absolutely can’t afford
whole life insurance. For more information on this, reach out to
Melton McFadden today!