The advantages offered by life insurance vary with the type of policy and the problem to which the policy is applied. These advantages are highlighted in subsequent chapters that describe the particular types of policies and the applications to which they are most suited. However, all types of life insurance policies provide certain favorable features, which are listed below.
1. Life insurance provides a guarantee of large amounts of cash payable immediately at the death of the insured. The amount of the death benefit payable is usually significantly greater than the premiums paid for the policy.
2. Life insurance proceeds are not part of the probate estate. The only way life insurance benefits become part of probate is when they are paid to or for the benefit of the estate of the insured. Therefore, the insurance company can pay death proceeds to the beneficiary without the delay caused by administration of the estate.
3. There will be no public record of the death benefit amount or to whom it is payable.
4. Life insurance policies generally have some protection against creditors of both the policy owner and of the beneficiary. The amount of protection varies from state to state.
5. Life insurance cash values provide instant availability to cash through policy loans. The interest rate (or interest rate formula) for policy loans is known in advance and is usually lower than the rate applicable to loans from other sources.
6. The death benefit proceeds from a life insurance policy generally are not subject to federal income taxes.
7. The increases in the cash value of a life insurance policy enjoy federal income tax deferral. Interest earned on policy cash values generally is not taxable unless or until the policy owner surrenders the policy for cash.
8. Life insurance proceeds often are exempt from state inheritance taxes.
9. Despite some highly publicized life insurance company insolvencies, the life insurance industry remains unparalleled in safety among the financial intermediaries such as the savings and loan, banking, and mutual fund industries. It is commonly noted that not a single dollar of death claim has been lost or denied because of a life insurance company insolvency or failure.
1. Life insurance is not available to persons in extremely poor health (although almost all individuals in poor health can obtain insurance).
2. Life insurance is an extremely complex product that is hard to evaluate and compare. The time required to gather policy information, decipher it, and compare it with other policies discourages purchasers from engaging in comparison shopping.
3. The cost of coverage reduces the amount of funds available for current consumption or investment.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM