There are really only two types of life insurance; term and whole life. ‘Term’ insurance is just that, life insurance for a given term, or ‘whole life’, life insurance that builds cash value over a person’s ‘whole life’.
The purpose of life insurance, pure and simple, is to create an instant estate in the event of an untimely death.
The cost of life insurance is determined by actuaries; pure statistics based upon the chances of death at a particular age, as well as the health and habits of the proposed insured, male or female.
Actuaries determine that a 25 year old male that weighs 160 lbs that doesn’t smoke, with no prior health concerns is a better risk than a 35 year old male that weighs 350 lbs, is a smoker and just had his gall bladder taken out.
Therefore it stands to reason that the older a person gets the greater risk they become to insure. Actuaries determine at what cost a company is willing to accept the exposure of insuring a particular risk.
So if that 25 year old male wishes to create an instant estate in the event of his untimely death for his family, he may choose term insurance.
For sake of example, let’s say he wishes to have a policy that will pay a death benefit of $500,000.00 if he were to die unexpectedly. The premium, based upon the actuaries will increase each year according to the cost of insurance for his increasing age. This kind of term insurance is called ‘level term’, because the death benefit or face value remains the same for the ‘term’ of the policy. Since it is ‘term insurance’, there is a date on that policy that it will terminate. It may be 10 year term, 25 year term, or term to age 70, or some other age.
But let’s say instead of level term, he wishes to replace that $500,000.00 face amount with investments such as the equity in a house and some profit sharing through his company. By his investments, he assumes that year after year, he will have created his estate as he grows older, and his need for creating an instant estate through life insurance will decrease. Now instead of paying more for the insurance, his premium will remain the same, but the death benefit or face value will decrease. This is called ‘decreasing term’; it is also very commonly called ‘mortgage insurance’, because many people get this kind of term insurance, as it decreases in face value as a loan is paid. Instead of paying an increased premium to keep the face value the same, he can take that money and put it toward his profit sharing in order to create his estate in time.
In each of the examples, the cost of the actual insurance remained the same, for level term, the premium went up as he increased in age, for decreasing term, the premium remains the same, but the death benefit decreased.
In the above example of the decreasing term insurance, the 25 year old, instead of paying more for level term, invested the difference in the prospect of building an estate. Some life insurance plans, or ‘whole life’ plans, have investment or savings bundled into one with the life insurance, so a person pays one level premium. If the insured dies, the face value of the policy plus the cash value becomes the death benefit or estate, yet if the insured does not die, the policy can be cashed at its cash value in the future.
Either way a person chooses, whole life or term insurance, each policy should have stated on it what the cost of ‘pure insurance’ is based upon the actuaries.
It is a common mistake that people make when they think they would never buy life insurance that does not build cash value. What they are overlooking is that if they get ‘whole life’ insurance, they are going to pay extra for that cash value portion of the policy. Some people choose whole life, as they feel secure having life insurance and living benefit bundled into one. Others feel like their life insurance needs may change and they don’t want it bundled with their investments. They just simply want pure insurance to create an estate in the event of their untimely death.
Either way a person chooses, life insurance is peace of mind. Since no one knows their future, with life insurance they can rest assured that the ones they love can be provided for if in the event of an untimely death.