Life insurance has plenty of benefits the living can enjoy

Last week, I had an opportunity to listen to an insurance sales agent make a presentation on a whole life insurance cover product to members of an investment club gathered for an annual meeting.

While his presentation was well done, many of the members in attendance snubbed the idea of buying up a whole life insurance cover. They described the cover as devoid of any tangible benefits for the insured while alive since all the benefits are accessible upon the demise of the insured.

This is a misconception that has discouraged many households from securing a whole life insurance cover while others have cancelled their covers to cash in on the benefits while they are still alive at the expense of protecting their dependants. With the introduction of unit-linked insurance covers, there are so many “living benefits” that the insured or a policyholder could enjoy while still alive and keep the whole life policy running.

Today, many insurance firms have rolled out flexible covers with adjusted the features where the policyholder pays regular premiums until a specified age, say 65 years, beyond which they stop paying the premium and only enjoy the cover until their death when the benefits are paid to the beneficiaries.

The benefit of this kind of cover is that it spares the policyholder financial distress of paying the premiums in their sunset years but still sustain their policy for the benefits of their dependants. However, this provision comes with higher premiums as the rates increases annually.

Besides, in the whole life policies where the policyholder pays a constant premium without changes until one dies. This makes budgeting easier. While in retirement benefits schemes, the benefits paid out before retirement age are subject to punitive taxation, beneficiaries in whole life insurance covers, are paid no matter when the insured dies, as long as premiums were fully paid.

In addition, any investment income earned on the premiums paid within a life insurance cover is tax-deferred, meaning you do not have to pay tax as the cash value of your whole life policy increases.

Overtime, when an emergency strikes and you are in dire need of cash, you as the policyholder could opt to borrow from your insurance company against your whole life policy without facing income tax on the loan amount.

Most insurance firms are ready to offer a loan equivalent to the cash value. While doing this, you should note that you are not borrowing your own money but you are borrowing from the insurance company, which charges an interest on the amount loaned.

This interest rate is often relatively lower than that of banks. Your policy continue to run as long as you pay premiums and service your loan to replenish your cash value. Also, the loan would help you to continue paying your premiums as well as meet your other financial obligation.

If not carefully utilised, this loan facility may have dire consequences on your policy. In case of death before repayment, the insurance company deducts the loan plus the interest charged from the benefit before passing the surplus to the beneficiaries.

Conversely, if you opt not to repay your loan after a long time and you walk away, you will be entitled to pay a debt to the insurance company arising from the interest rates charged on the loan.

Remember that any time you cancel your life policy, you are only entitled to a surrender value limited to a portion of the cash value and not the death benefits.

Therefore, if you opt to cancel your policy, you automatically owe the insurance since they deduct the loan plus the interest from the surrender value applicable.

Alternatively you could choose to use your cash value as a collateral when applying for a loan from a commercial bank. This depends on the arrangement that the insurance company has with the banks.