Determining Cost Of Life Insurance

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Life insurance is important for anyone with a spouse or family. No one wants to think of their families being left out in the cold following an accidental or sudden death, but often people choose to put off buying life insurance because they fear it will be too expensive. This is not always the case.

The cost of pure life insurance depends primarily upon how much chance there is that an insured person will die within the coming year. In estimating this chance, the insurance companies put their main emphasis upon a person's age. Among a large number of people, such as all residents of the United States considered as one group, vital statistics show that after children reach about ten years of age, their mortality rate increases gradually each year, as they grow older. Whatever age you start from, a man's risk of dying is estimated to be higher in the second than in the first year ahead, still higher in the third year, and so on.

Other things being equal, the lowest premium rate is offered on a policy lasting only a few years. When a contract covers more years, we have this inconsistency: the mortality rate rises with age, but the premium rate does not change. The trick is that the company charges a premium rate higher than is needed at first, the extra premium dollars being held as a reserve to take care of the rise in mortality rate in later years. The longer the period of time a policy is to cover, the larger the premium rate is.

Most policies have a cash surrender value. A contract that expires at the end of a specified number of years, with no surrender value remaining, is called a "term" policy. This book sometimes calls these contracts "pure" life insurance, because they are limited to the one job of giving protection in case of death, without being mixed with a savings plan. Term insurance is usually considered a temporary arrangement, but the term can be as long as forty-five years. Discussion of term policies will be resumed a little later on.

The great majority of policies are a combination of life insurance and a systematic savings plan. Contracts vary greatly in the degree of emphasis upon savings. In some, after only a few years the surrender value exceeds the original death value, and from then on, the policy is wholly a savings plan, with no real life insurance. A policy owner can borrow all or part of the surrender value, the company charging about five percent annual interest.

In the most common type of insurance-savings combination, usually called "whole life," the surrender value grows slowly, not rising to equal the death value until some such age as 85 or one 100, if anybody ever keeps on paying premiums that long. On some whole-life policies the minimum death value is very much larger than the traditional $1,000, and this permits the company to charge a lower premium rate than with a smaller minimum. Instead of stating this difference in a clear manner, the companies usually make technical distinctions, so that it is especially easy for a buyer to become confused among whole-life policies, essentially alike, offered by the same company.

It is extremely important for a person buying life insurance to read the fine print and make sure they understand how the policy truly works before making a commitment to buy. Life insurance doesn't do much good if the payout value is less than the policy is worth.

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