Advantages and Disadvantages of Life Insurance – Pros and Cons of Variable,Universal,Term Life Insurance and Investments

Life Insurance is one of the most widely available and used financial products being used by people.But before buying various types of life insurance such as variable,term life insurance not many people do a pros and cons analysis.This is quite sad since it is one of the biggest yearly expenses and is one of the most important security assets for our family in case of death or serious injury.Life Insurance has different meanings in different countries as well.In India Life Insurance is mostly looked upon as an investment product.Most people buy insurance as an investment product leading to the wide prevalence of hybrid insurance investment products like ULIPs ,Child Plans etc.It is easily found that these hybrid products are  wasteful since it would be cheaper to buy separate investment and insurance products.The main reason for the misselling is the financial illiteracy and ignorance about the advantages and disadvantages of life insurance and its products.Life Insurance Companies also don’t do a very good job in educating people about the right type of product as it is more profitable for them to sell the products which are disadvantageous to the customers.So we have a case where Life Insurance products advantages and disadvantages are not known and understood by most people around the world.

Advantages of Life Insurance

1) Life Insurance is not an Investment , Life Insurance is an Expense and not an Asset.It is an expense just like your health insurance to make sure in case of serious illness you are covered and not in a position to pay the costs of your illness leading to your life ending in a bad manner.Life Insurance makes sure that your dependents can lead a decent life economically despite your death.This is the main purpose and advantage of life insurance

2)Tax Advantage –  A number of countries allow you to offset the premiums that you pay for you life insurance in your taxable income.Also the maturity amount that you get is also not taxable in a number of places.Insurance is widely used by financial advisors to reduce your tax burden.

3) Advantage of Term Insurance – While Insurance Companies sell a wide variety of insurance products like term,variable,universal insurance most are complex and intended to fleece customers.Term Insurance is the best life insurance product for its simplicity and cheapness.It gives you a lump sum amount in case of death and has no clauses and conditions.Its very simple to understand and the cheapest insurance product as well.

4) Flexibility in Coverage – Life Insurance is supposed to cover you till the time you have enough of a corpus for your dependents.You can take life insurance for 5,10,15,20 year.This also depends on your age but you get the basic idea.Suppose you have $50,000 in savings and you need another $450,000 for your family to be comfortable in case of your death.If you save $50,000 every year then it means that you need 9 more years to get to your target.In that case you can take life insurance for 9 years

5)  Government Regulation provides Safety – The government heavily regulates the insurance sector making sure that your insurance company has enough assets to cover your liability.This means that you have the peace of mind that in case of your death the money will be given out by the life insurance company and it does not go bankrupt.Governments make sure that insurance companies don’t fail like banks.Even if they do their liabilities are taken over by the governemtn

6) Universal and Variable Life Insurance Advantages – While in my opinion both of these 2 types of insurance are a complete waste of time and money they offer the advantage in some specific niche cases.These offer the option of investment and insurance by giving you an interest in the cash value of your insurance.Variable insurance allows you to change the premiums on your life insurance.However the complications of calculating mortality and investment in a hyrbird product is beyond the intelligence of most people in my opinion and you are better staying away from these products.

Disadvantages of Life Insurance

1) The Cons of a Life Insurance chosen carefully is almost negligible.However the disadvantage of Life Insurance arises when it is used as an investment product.Insurance companies also promote these as people are uncomfortable in paying premiums on which returns are uncertain.They think that if you are paying for insurance you msut get back something.This is because of the psychological make up of humans where we underestimate the chances of our demise.

2) Buying Life Insurance when you have no Need – People buy insurance when they have no need for example an old woman buying life insurance.Also the example of buying life insurance for a very long time period till you are 80 years old.At that age you have no need since you would have no dependents and earning power as well.

3) Buying Complex Life Insurance Products like ULIPs,Endowment,Child Plans etc which give sub optimal returns – Millions of people every year buy insurance products without understanding it.Most of the complex products give suboptimal returns and have no suitability for the buyers.Agents frequently give bad advice to get more commissions.Copmanies also make more money by selling complex producst which people don’t understand.

4) Buying Expensive Policies – People have little clue and don’t compare life insurance products even from the same provider.Sometimes they buy insurance policies which are far too expensive leading to heavy burden which is unnecessary.

Buying Life Insurance is not Rocket Science however this trillion dollar industry has made it complicated.There are hundreds of types of insurance and products which makes choosing a difficult thing for a person.But keeping it simple like buying term insurance for your insurance needs and other financial assets for your investment will keep it simple.

Read why government insurance companies in India are the best way to buy insurance.