Insurance Policies
Written by Neil Galloway
Many questions arise when you are buying insurance. What type of policy should I buy, how much should I get, what company should I purchase it through, etc, etc, etc. This article will discuss them briefly.
Some terms that will come up:
- Face Value: The insured value of the policy. If you buy a $200,000 policy, the amount paid out by the insurance company is the face value ($200,000).
- Fee: The fee you pay the insurance company to have the face value of the policy.
- Investment Pool: Extra money you have invested in the insurance policy above and beyond the fee
Types of Insurance Policies
Whole Life
These policies have a fixed rate you pay in for your entire life. There are two components to whole life policies. The face value (the value you are insuring yourself for) and the investment pool (where you can put extra money into and earn a modest rate of return). Financial planners say the benefit of the investment pool is that once you have built it up enough (by contributing extra money every year), the interest earned off this pool will be enough to cover the payments for your policy for the rest of your life.Universal Life
Very similar to Whole Life. These policies are paid at a fixed rate for the rest of your life. There are two componenet. The face value (the value you are insuring yourself for) and the investment pool (where you can put extra money and earn interest). Same advantage as described above, except you have more control over what investments the extra money is put into.Term
These policies have a fixed rate for a span of 10, 15, or 20 years. They are intended for temporary needs and because of they expire, are quite a bit cheaper (for the same face value) than whole life or universal life policies.My reasons for having both policies are this.
- Term policies cover temporary needs and are cheap. So mortgages, children, business debt, or other loans represent needs that are temporary. They are quite large and will go away eventually. Term life insurance is a great way to give you piece of mind for your family.
- Universal is coverage for life. This will give you insurance to clear up any matters outstanding even if you live for quite awhile. It can help with funeral arrangements, lawyer fees, inheritance taxes, and other unforeseen costs.
- Universal also has the investment pool aspect to it. The advantage with this is you are able to add extra money into this side and it will be "tax sheltered". You can buy and sell funds (typically mutuals and indexes) without having to claim any capital gains on your tax returns. If you draw out of this later in life you will have to pay the tax, but if you pass away, the beneficiaries will receive all these capital gains tax free.
- There is also another feature to universal policies. Some banks will loan you up to 75% of the value of the investment pool as a "monthly payment". Since this payment is not income as it is a loan from the bank, you do not need to pay income tax on it. When you pass away, the investment pool side of your policy is then used to pay back the bank and because it taken out after your death the capital gains are not taxed. This could be a great way to supplement your income after retirement, while avoiding tax. A couple pitfalls here though. The market has to perform well for your investment pool and you are limited as to how much money you may contribute per year (government restriction to prevent high income individuals from tax sheltering too much).
If you enjoyed this post, then make sure you subscribe to my RSS feed or subscribe for email updates. Only one email a day and only if there was a new post.
Related PostsEmail this article
Category: Finance
0 Comments
No approved comments yet.