All That Glitters Is Not Gold: Financing Life Insurance
What is Financing?
Financing is probably the least-understood term in the insurance industry. It means that you pay a premium and your insurance company pays your claims. This may sound like an easy way to get life insurance, but it’s not always effective and it can come with some serious drawbacks. Financed life insurance is usually offered by independent agents or companies that sell directly-to-consumer. The policies vary, but most companies will finance a portion of the policy for up to 15 years with no interest or minimum monthly payments required from you during this time period. I think my choice of career path makes it clear that I love insurance, but financing is just not a good idea.
Why Financing is Not the Best Option
The only time I recommend financing your life insurance is if you have no other option. This may seem harsh, but it’s the truth. Financing has some serious drawbacks compared to traditional policies at normal rates or term life. Here are some of my reasons for saying this:
Financed life insurance may require a medical exam which could lower your policy’s face amount because of an existing condition, health problems discovered during the exam, or because you’re overweight. Term policies do not require any medical exams and they offer flexible payment plans that allow you to pay monthly until the end of term with no interest charged on premiums paid before death or surrendering the policy early. You can always pay more than your minimum premium payments on financed policies if necessary later in life without having to worry about interest being charged on these additional payments made after taking out the loan initially. You will still pay interest on financed policies, but the terms are usually more favorable than if you were to finance through a bank or credit card. With term life insurance, there are no set payments to be made unless you cancel the policy early for whatever reason. Interest is charged only on premiums paid before death or surrendering the policy early.
You may have heard that financing is good because it allows you to build cash value in your policy, but I’m not convinced that this is true. You will likely have better cash values with term life insurance because of the lower costs overall when compared to financed policies—and even traditional ones at normal rates! It’s important to remember that your cash value can take years if not decades in some cases to accumulate enough money for a payout after your death, and it won’t do anything for you while alive unless you invest wisely in order for it grow faster. The downside of investing with life insurance is that many companies charge extra fees when using investment options instead of just holding funds in an account somewhere without any return whatsoever—which could be where all of this extra money goes when taking out financing! Financed policies are also usually limited when it comes to paying loans back early without having interest charged back on top of premium payments made after taking out the loan initially. This is not the case with term life insurance.
Paid-up additions to your life insurance coverage can also be a good option for those who plan on leaving their policies alone and don’t want to make additional premium payments later in life. Paid-up additions do this for you and they can protect your loved ones until the end of time (or until the policy pays out). I personally like paid-up additions, but if you think that they’re an unnecessary expense it’s probably best that you avoid financing as well—especially if you’re looking for something more affordable than a paid-up addition!
So what should I do if I’m interested in getting financed life insurance?
If you have bad credit or no credit at all, financing is pretty much your only option because most companies will not offer traditional policies without a payment history. If this is your situation, then go ahead and take out a loan with an interest rate of about 10% or so—make sure it’s tax deductible though! If not, look into some other types of loans such as mortgages. They have lower interest rates than most standard loans if taken out from banks or credit unions instead of independent companies that may charge higher rates due to risk factors involved with lending money. Keep in mind that some states offer special programs designed specifically to help people get on their feet financially after bankruptcy by offering them low interest rates on car loans and mortgages along with giving them flexibility when making payments.
Financing life insurance isn’t the worst option, but it’s nothing to be excited about either. I hope this post was helpful and please share with your friends and family if you found it so!