How to Compare Permanent Life Insurance Policies
Life insurance plans are one of the most important investment decisions. Add to that the numerous policies available in the market, anyone can get confused as to which one to choose. If you are also having difficulties deciding which life insurance policy to choose, then this article will be helpful for you. With this article, we have compared the advantages and disadvantages of various life insurance policies that may guide you in making your decision.
Permanent Life Insurance Plans
Permanent life insurance is a policy with no expiration date. Such policies have two main advantages - cash value and death benefit. With cash value benefit, a policyholder can withdraw or borrow any amount of cash from the policy after a certain time. With death benefit, the policy will pay the insurance amount to the insured's nominee after the insured's death.
Types of Permanent Life Insurance Plans
There are two kinds of permanent life insurance policies available in the market. Both types have a saving component and a death benefit. However, there is a distinction between the two permanent life insurance policies. While the whole life insurance policy guarantees a saving component, the universal life policy's cash value largely depends on the market performance. In addition, the universal insurance policy provides policyholders with a variety of premium options.
However, there is one condition that applies to both the insurance policies - You may lose your insurance policy if you stop paying your premiums.
Internal Rate of Return
The internal rate of return of a policy's death benefit helps people in deciding which of the two permanent life insurance they should choose. Internal rate of return is a great evaluation tool that helps determine the interest rate at which the net present value (NPV) of the premium paid becomes the same as the net present value of the death benefit. Many believe that insurance policies that have similar premiums and a high IRR value are worth investing in. In the early years of a policy, life insurance has a very high internal rate of return. After that, the rate gradually declines with time.
Other Factors to Consider
There are various other factors that you should keep in mind while choosing a life insurance policy. These factors are mentioned in brief below:
- Health and Age: Many insurance agencies prefer young clients who do not suffer from any kind of health condition. The premiums are also cheaper for such clients. This is because the insurance agencies believe that a young client lives a long life. Similarly, an elderly person's or a person having health issues can have an expensive premium on their life insurance. Hence, it is always wise to invest in a life insurance policy while you are young.
- Death Benefit: The death benefit is another factor you should keep in mind while signing up for a life insurance. The death benefit, however, depends on your financial situation and how much money you want to leave for your beneficiaries. It is advised to go for a life insurance policy that will give you a death benefit that is four to five times more of your annual income. Keep in mind your annual income, any debt you have and any other financial factor while signing up for a life insurance policy with your preferred death benefit.
- Insurance Agency: The insurance agency you sign up with also plays a big role in your life insurance policy. Consider an insurance agency's stability and financial grade before signing up with them. This is because you might not get the advantages you paid for if you choose an agency that's not financially stable.Consider every factor carefully and choose a life insurance policy that will give you the highest internal rate of return on the death benefits.
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