Jane Dotson
Life insurance is a contract with an insurance company to provide a lump-sum payment, known as a death benefit, to a beneficiary when the insured person dies. While the primary purpose of life insurance is to provide financial protection for loved ones, additional protection can be added to a policy in the form of riders. Riders are add-on coverages that allow policyholders to customise their policy to suit their specific needs. For example, a waiver of premium rider can cover premium payments if the policyholder becomes disabled and unable to work, while an accelerated death benefit rider allows the insured to collect a portion of the death benefit while still alive if they are diagnosed with a terminal illness. Life insurance policies can also be supplemented with additional policies to provide further coverage.
| Characteristics | Values |
|---|---|
| No increase in premium payments | Paid-up additional life insurance coverage represents coverage you already paid for with dividends the policy earned |
| Larger death benefit | Reinvesting your life insurance dividends into paid-up additional life insurance coverage helps you to easily raise your death benefit coverage |
| No additional underwriting | Paid-up insurance does not require new underwriting or medical exams |
| Increased cash value | Purchasing paid-up additional life insurance helps you accelerate your tax-deferred growth without paying more |
| Potential dividend compounding | The larger your death benefit, the more dividends you receive |
| Easier policy management | Paid-up additional life insurance helps make it easy to raise your coverage amount without purchasing and managing two separate policies |
What You'll Learn
Mortgage protection insurance
Pros of MPI
- Most MPI policies are issued on a "guaranteed acceptance" basis, which can be beneficial if you have a health condition and pay high rates for life insurance or struggle to obtain coverage.
- MPI can provide peace of mind, ensuring that you won't leave your loved ones in financial distress or at risk of losing their home if you die while still owing money on the mortgage.
- The insurance company typically sends the money directly to the lender, so your family doesn't have to handle the payments.
Cons of MPI
- The MPI premium is an additional burden on your monthly budget.
- If your mortgage is nearly paid off, or you have sufficient funds to pay it off, MPI might not be the best use of your money.
- The payout amount declines as you pay off your mortgage, but your premiums stay the same.
- MPI might not be the best option if your loved ones need the money for other expenses related to your passing.
- MPI is not as flexible as other types of insurance like disability insurance and life insurance.
MPI vs Life Insurance
While MPI and life insurance both pay out benefits upon the policyholder's death, life insurance is more flexible. The beneficiary of a life insurance policy can use the funds as they see fit, whereas with MPI, the beneficiary is the lender, who will only use the payout to repay the mortgage. Life insurance companies also offer a wider range of coverage and premium policies. MPI limits coverage based on your property and personal health.
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Whole life insurance
One of the key advantages of whole life insurance is that it offers peace of mind and financial stability to the policyholder and their loved ones. The consistent premiums and guaranteed death benefit ensure that the policyholder's dependents will receive financial support in the event of their death. Additionally, the cash value component provides an opportunity for wealth accumulation, which can be accessed during the policyholder's lifetime or left as an additional benefit for their beneficiaries.
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Universal life insurance
The premiums for universal life insurance consist of two components: the cost of insurance (COI) amount, which covers the charges for mortality, policy administration, and other associated expenses; and the saving component, known as the cash value. Policyholders can make payments that are more than the COI, and this excess premium is added to the cash value and accumulates interest. Alternatively, if there is enough cash value, policyholders may lower or skip payments without the policy lapsing.
The main disadvantage of universal life insurance is that the cash value can be affected by underperformance of investments or underpayment of premiums, which could impact the death benefit or cause the policy to lapse. Returns are not guaranteed, and some withdrawals are taxed. Additionally, upon the policyholder's death, the insurance company retains the cash value, and the beneficiaries receive only the death benefit.
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Term life insurance
Guaranteed Death Benefit
Lock-in Periods
Convertible Coverage
Affordability
Portability
Unlike employer-provided plans, term life insurance policies are typically portable. This means that if you change jobs, you can keep your coverage, ensuring continuous protection.
Add-ons (Riders)
Income Tax-Free Death Benefit
The death benefit paid out to beneficiaries is typically income tax-free, providing financial support without additional tax burdens.
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Permanent life insurance
There are several types of permanent life insurance policies, including whole life insurance, universal life insurance, and variable universal life insurance. Whole life insurance offers fixed premiums and coverage for your whole life. Universal life insurance provides flexible premiums and coverage amounts, while variable universal life insurance allows you to manage your policy to balance growth potential through underlying investment options.
The cost of permanent life insurance depends on various factors, including age, medical history, family size, and location. It is generally more expensive than term life insurance but offers the advantage of lifelong coverage and the potential for cash value growth.
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Frequently asked questions
Additional protection with life insurance refers to extra coverage that can be purchased through riders or dividends. This allows you to increase your death benefit and cash value without raising your premiums.
Additional protection offers several advantages, including no increase in premium payments, a larger death benefit, no additional underwriting, increased cash value, potential dividend compounding, and easier policy management.
Additional protection can be beneficial for various individuals, such as retirees who want access to more cash value, young families who need to increase coverage, high-net-worth individuals seeking inflation protection, and older policyholders who want to avoid further underwriting.
Additional protection can be purchased through a Paid-Up Additional (PUA) rider or by reinvesting dividends from a dividend-paying whole life insurance policy. This extra coverage boosts your death benefit and accelerates tax-deferred growth.
If you don't need additional protection, there are other ways to use your life insurance dividends, such as receiving them as cash payments, lowering premium payments, earning interest in a savings account, or paying down policy loans.
