Buying Insurance

Lesson 4: Personal Life Insurance

Permanent Life Insurance

Permanent life insurance is pretty much what it says it is. Assuming that you make your payments for the specified period of time, the insurance company guarantees by contract that the dollar amount of insurance (insurance jargon:face value), and in certain circumstances a good deal more, will be paid to your beneficiaries when you die. Permanent life insurance can be confusing because insurance companies give it different names, such as Whole Life, 65 Life, 20 Pay Life, Universal Life etc. The differences chiefly boil down to how much you pay and how long you pay. This is a matter you will want to thoroughly discuss with your insurance agent to make sure that you are getting the kind of policy that best meets your needs. Regardless at what age you contemplate purchasing permanent life insurance, on a dollar of cost for dollars of insurance basis, permanent insurance will always be more expensive than term life insurance at the outset. The reason for this is that a certain portion of each of your payments is going into a reserve fund (insurance jargon:cash value) which the insurance company is investing and from the earnings on which they pay a portion of the annually increasing "risk" cost of your life insurance (see the discussion of term insurance above.) Consequently, unlike term insurance, which must either increase in cost annually as the risk of death increases with age, or which must be limited in time so that the risk cost can be apportioned over that period of time, permanent insurance payments are fixed for the entire period of payment. Many permanent insurance policies can be structured to be "paid up" at a certain period, say at age sixty-five, or after twenty years of payments. This means that your payments have ended but your insurance will be there when you die. If at some point you decide to cash in (insurance jargon:cash surrender) your permanent life insurance for the cash value of the reserve fund, then you get that cash and your insurance is terminated. (Buyer beware:don't be swayed by claims of exorbitant cash value accumulation in a life insurance policy. Likewise, don't be dismayed by modest guaranteed cash values. You are buying life insurance not stocks or bonds.) You will want to consider carefully before cash surrendering a policy, particularly if you are middle aged, or have developed a health conditon, or have few other resources to pay for death costs. Hungelmann takes up the variations of permanent life insurance pp. 296-301.

So let us sum up. The truth is that most people have woefully inadequate life insurance. For the sake of those who will live after them, they need to give thoughtful consideration the problem. Both term and permanent life insurance have their uses, and both have their pros and cons. In many situations, a mixture of the two may prove the best answer. Chiefly it is a matter of priorities. For many folks the need is to move personal life insurance higher up the priority list.

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