While it's true that the main reason you
have for buying a life insurance policy is for the income protection provided
to survivors in the event of your death, there are actually a number of other uses for life insurance that you may not have considered.
When facing the choice of what type of life
policy is most appropriate for your needs there are two main options – permanent coverage, typically referred to as whole
life insurance or temporary coverage, also called term insurance.
Each insurance type has its own pros and
cons, with whole life carrying more expensive premium costs for a death benefit
equal to that in a term life policy, but term life possesses no cash
accumulation value similar to that of whole life. Generally speaking, term
insurance is best suited to a young policyholder whose income is tight but who
has a young family for whom he or she wants to provide income protection in
case of an untimely death. With term coverage, you're able to get the most
protection for the least amount of premium cost.
Benefits of Whole Life
While premium costs for whole life coverage
is higher than the cost of a term policy with the same face value, whole life
policies contain a cash value provision that slowly accumulates over time.
Since a whole life policy is good for the life of the insured, as long as it's
kept in force by maintaining current premium payments, as the years go by the
cash value steadily increases in an account that is accessible to the
policyholder. The insured can either borrow this money or, upon the decision to
surrender the policy, totally cash out the accumulated amount. By definition,
this makes your term life insurance policy a liquid asset. A side benefit of
this cash accumulation is that it's not taxed as long as the policy is in
force. Even when money from the account is borrowed, that money is also not
taxed as long as the amount withdrawn is less than the total amount of premium
that's been paid toward the policy.
What's a Liquid Asset?
A liquid asset is one that can easily
be converted into cash with minimal impact on its value. The cash accumulation
of your whole life policy falls within this definition. Since a term life
policy has no cash accumulation provision it is not a liquid asset.
Townhomes and condos are sometimes confused
one for the other but they actually differ in a number of ways. One of the most
pronounced differences between a condo (or condominium) and a townhome (or
townhouse) is that condos, much like apartments, include only the
structure within the interior walls. A townhome, on the other hand, also
includes the exterior of the structure, including the land that the building is
sitting on.
The land on which a condo is located is the
responsibility of the homeowners association (HOA), to which each residential
unit owner is required to be a dues-paying member. The condo HOA is also
responsible for the upkeep and maintenance of all hallways, common
areas, the building's exterior surfaces and the roof. Townhouse owners are
also subject to membership in their HOA, but typically the monthly dues they
pay will be less than that charged by condo associations and rules
regarding the individual residences are more flexible.
Other Differences in a Condo vs Townhome
Condos, similar to what you'd expect of an
apartment, are “typically” single-story occupancies while townhomes are often
two or sometimes three floors in design. Because of this, townhomes will
normally contain quite a bit more square footage in the living area than a condo.
While attached to a neighbor by way of one or two common walls, a
townhome is much like a house in many respects. Think row house. Condo
owners aren't free to adorn their unit's exterior as they wish and most HOAs
will have specific regulations on this. Townhomes may be much more unique in
their appearance when compared to the other, neighboring units. Plus, with an
outside area belonging to the townhouse, owners may have their own garage,
lawn, garden space, etc.
Insuring a Condo vs Townhome
Since a condo owner is only directly
responsible for the space within the walls of the residence, with the
homeowners association responsible for common areas, the building exterior
(including the roof) and, basically everything else on the property, less
insurance is needed by condo owners than typical homeowners, including townhome
owners.
A condo policy, known as HO-6
insurance coverage, typically
contains a clause covering the homeowner in the event that the HOA's master
policy has an insufficient limit to cover a claim and owners are assessed an
additional fee to cover damages. Townhomes are typically covered by HO-3 policies, just like most regular homes.
Homeowners insurance is something that every
homeowner either has or should have, with the exception being those who are so
wealthy that the loss of their home would have no serious effect on their
financial situation. Anyone paying off a home mortgage is likely required
by their mortgage lender to have a homeowners insurance policy because this is
what protects the lender's financial interest in the home, ensuring that if the
home is damaged or destroyed, it's protected by adequate insurance coverage.
What Homeowners Insurance Covers
Homeowners insurance typically covers three
areas of potential loss:
- Damage or destruction of
the physical dwelling and other structures, such as garages, sheds and
fences. This damage or destruction must be the result of a specific peril outlined
in the homeowners policy.
- Personal property that is
damaged or destroyed as the result of any of the same perils covered under
the dwelling coverage in the policy.
- Personal liability
coverage protects you in the event that you or someone in your household
is sued as the result of property damage or bodily injury caused to a
third party. This part of your homeowners policy will help pay the costs
of defending you in a lawsuit, even if the matter is settled out of court.
Sometimes You May Need More
While your homeowners insurance policy has a section that provides you with a certain
amount of liability insurance, it should be understood that any and all claims
against that policy will only be paid up to the policy limits set forth in the
contract. As an example, let's say you have a backyard trampoline and one of
your neighbor's children has an accident and breaks his neck. The medical costs
for this injury plus a potential lifetime of this child being confined to a
wheelchair could amount to a judgment equaling millions of dollars. This amount
will surely be significantly more than the liability coverage limit in your
homeowners policy.
One solution to this problem is to take out
a property liability policy to address any particularly high risk situation you
have on your property. A backyard swimming pool likely puts you into this high-risk
category.
Another strategy you can use to cover your
excess liability risks is to take out a PUP (Personal Umbrella Policy). This coverage works in conjunction with not only
your homeowners but also your vehicle insurance. Consult with your agent.
