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Advantages And Disadvantages of Life Insurance

Every form of Insurance has it’s own form advantages and disadvantages. With life insurance, you are sure your family and loved ones will have something to fall back to if in any case there is a sad incident of your death. In this articles, we will be looking at the Advantages of Life insurance and the disadvantages. Before you forge ahead to purchasing a life insurance cover, do make sure to see this 4 benefits and demerits of the life policy.
Related: Life insurance and how it works

Advantages of Life Insurance

the benefits of having a life insurance coverage policy are

1. With Life insurance, you will have infusion of cash for dealing with the sad/adverse financial consequences of the insured’s death.
2. Life insurance has favorable tax treatment unlike any other type financial instrument.
   • Death benefits are generally income-tax-free to the life insurance beneficiary.
   • Cash values grow tax deferred as the lifetime of the insured’s go on.
   • Death benefits may be estate-tax free as well provided the policy is owned properly.
   • Also Policy loans are income tax free.
   • Cash value withdrawals are handled on a first-in-first-out (FIFO) basis, meaning cash value withdrawals up to the total premiums paid are generally income-tax free.
   • Life insurance policy coverage may be exchanged for another life insurance policy (or with an annuity) without attracting current taxation.

Note: All of the above statements are generally true; however the tax benefits of life insurance comes with certain limitations which when under the wrong set of conditions, can make the tax benefits mentioned to be lost.  You can discuss this with your insurance and tax adviser.

Quite a good number of life insurance policies are very flexible in terms of adjusting to the policyholder’s needs.  Also, the death benefit may be reduced at any time and the premiums may be easily reduced, skipped or even increased.

3. A cash value life insurance policy might be seen as a tax-favored repository of easily accessible funds if the need for it arises; nevertheless, the assets backing up these funds are held in longer-term investments on a general scale, thereby earning a higher return.

Disadvantages of Life Insurance

1. Most times, cash surrender values are always less than the insurance premiums paid in the first several policy years and sometimes a policy owner may not even recover the premiums paid if the policy is to be surrendered.
2. Policyholders undergo some active expenses to pay policy premiums.  Moreover, life insurance policy is typically purchased for the benefit of others and usually only indirectly for the insured person when he/she dies.
3. The life insurance coverage purchase decision and the positioning of the life insurance can be complicated especially if the insurance is for business situations, estate planning or complex family situations.
4. The acquisition of life insurance process can be pretty annoying and confusing (e.g. Is this the right product and carrier? Is the life insurance agent trustworthy?  How can medical examination and underwriting be streamlined?).

Got something else to add to this list about the advantages and disadvantages of life insurance? Do let us know what you think in the comment section.