Taking a Look at Life Insurance
LAST year Americans added $117,000,000,000 to their life insurance coverage, raising the life insurance coverage in force in the United States to $1,300,000,000,000. In 1940 this total was a little over $100,000,000,000, about the amount of last year’s increase!
Families are buying more life insurance than ever before. Fifteen years ago families owning life insurance policies averaged a total of $8,700 in protection. Today this has skyrocketed to an average of $19,900 in coverage per family!
Obviously life insurance is a major item in many family budgets. Yet the average policyholder frequently knows less about his life insurance than he does about any other major purchase. This is so because insurance policies use terms that often are unfamiliar.
But whether they understand the terms or not, millions of persons keep buying life insurance. In fact, there are now some 400,000 persons selling life insurance in the United States alone. People buy policies from them because of the uncertainty of life; they need the protection that the insurance offers their families. The benefits of life insurance are at times quick in being realized.
At 8:30 one evening two newlyweds bought a $3,000 family policy with a $10,000 temporary rider. (A “rider” lets a person mix temporary insurance with permanent coverage.) They paid the first premium of $15.19. The next day the husband went to the stone quarry where he worked and was killed in an accident. The protection of the policy had gone into immediate effect because of payment of just one premium.
The result was that the widow was entitled to receive $6,000 in a lump sum. This was a double payment of the basic amount because of the accidental nature of her husband’s death. In addition, she will receive $10,000 over a period of time. Thus, the prepayment of just fifteen dollars and a few cents will provide $16,000 for a widow and her unborn child.
This case illustrates a basic truth. Life insurance cannot insure a person against death. But it can protect his dependents against some of the economic loss caused by his death. That is the primary purpose of life insurance.
For many persons life insurance has taken on a secondary role—that of building up a savings account to provide cash benefits in case one is disabled or if one retires.
Since there are different viewpoints with regard to life insurance and its various kinds of policies, how should a person who wants its protection buy such insurance? He should buy it according to his own needs, circumstances and outlook for the future.
Basically there are just two kinds of life insurance. There is a temporary kind called “term” insurance. And there is a permanent kind called “whole” insurance. This is also sometimes called “straight” or “ordinary” life insurance. Let us consider first the least expensive kind.
Term Life Insurance
As its name implies, term life insurance protects you for a limited term or time. It resembles insurance on cars and homes. Usually term policies are for five or ten years. If the insured person dies after the term is up, his family gets nothing. Term life insurance is not for the purpose of building cash value for use in future years. It is pure insurance for insurance’s sake only. Term insurance provides the maximum protection for the premium dollar. If a man thirty-five years of age, for example, desired a $25,000 coverage with permanent life insurance, it would cost him a yearly premium of about $415. But the yearly premium for a $25,000 coverage with five-year term insurance would be about $125.
A “renewable” term policy guarantees a person the right to renew a term policy regardless of his health. But he must pay a higher premium each time he renews. Yet when one is between the ages of twenty-five and forty-five the price of five-year renewable term insurance goes up relatively slowly. However, after one is sixty-five it is usually impossible to buy term insurance.
Over a lifetime, term insurance costs more than permanent life insurance. This is true because permanent insurance builds cash value that is received back. But for shorter periods of time term insurance gives protection at much lower cost.
Most term policies are one of two basic kinds: “level” and “decreasing.” What is the difference between these two kinds?
A ten-year “level” term policy for $10,000 insures you for $10,000 during the entire ten years. On the other hand, a ten-year “decreasing” term policy for $10,000 insures you for $10,000 only in the first year. Each succeeding year the insurance shrinks a little until it disappears at the end of the tenth year. Decreasing term costs less than level term because the company’s risk decreases.
A “convertible term” contract guarantees a person the right to exchange it for permanent whole life insurance regardless of his health. Of course, he must pay the difference in cost of permanent insurance. Generally, any term policy or term rider is convertible on this basis, but one must exercise the privilege on or before the time specified in the policy. The conversion privilege is very important to the owner of term insurance who finds himself uninsurable. One can check a term policy or rider to know the time limit.
Now let us have a look at higher-priced permanent insurance.
Whole Life Insurance
Whole life insurance usually costs about three times as much as five-year term insurance. However, the premiums of whole life insurance stay the same, whereas renewable term policies cost more at each renewal. Whole life policies charge a person an average annual premium based on insuring him for the whole of his life. This period is usually set at 100 years for statistical purposes.
Ordinary or whole life insurance is the kind generally promoted by insurance companies, and thus many salesmen may not recommend term insurance. A salesman also gets a smaller commission on a premium for term insurance than he does on the premium invested in ordinary insurance.
People buy whole life insurance so as to have permanent coverage and to accumulate money for the future. Part of the premium of a whole life policy goes toward building up cash value. Also, insurance companies pay interest on the cash value building up in a policy. If, for some reason, the insured person needs money, he can turn in his whole life policy and collect the accumulated cash value. But he does not necessarily need to surrender the policy. He can also keep the insurance. How? By borrowing its loan value, and then paying the interest on the loan as well as the premiums.
Unlike most term insurance policies, one can allow a whole life policy to lapse and still be covered. This came as quite a surprise to a New York widow recently.
This woman’s husband died in an automobile accident not long after letting his $6,000 whole life policy lapse. However, the husband was still covered under “extended term insurance.” The law provides that cash abandoned in such a policy is not forfeited, but automatically buys term insurance in the face amount of the policy for as long a time as the cash affords. The insurance agent brought the widow a check for $6,000.
It is important to note that in a lapsed family plan only the primary insured, the husband, is covered under extended term insurance. Let us consider family plans a little closer.
Variety of Policies
A family plan policy covers father, mother and children under one contract. Premiums are based on the father’s age. All newborn are automatically included at no extra cost. Death of the father means paid-up insurance for his widow and children. At age eighteen, twenty-one or twenty-five, depending on the contract, the children can convert to permanent life insurance regardless of their health. A typical family plan will cover a father for $5,000 and a mother and the children for $1,000 each.
Those who can afford to pay up their insurance completely during their peak earning years often choose “limited payment” life insurance. Ten-payment, twenty-payment or thirty-payment life means that one has a policy fully paid up in the specified number of years. The premiums are much higher than whole life because one is not paying for the whole of one’s life. Cash values build up faster than with a whole life policy.
Those who seek even greater cash buildup in a limited time turn to the expensive policy called an “endowment.” Like whole life insurance, an endowment policy is a combination of protection plus savings; however, the endowment policy definitely puts the emphasis on saving up money rather than on protection.
An endowment policy guarantees the insured person cash in the face amount of the policy when it matures. This may be, for example, in eighteen or twenty years, or when he reaches age sixty-five. At maturity the insurance protection ends and he takes the money in a lump sum or in installments. Frequently policyholders confuse their twenty-payment life policy with the higher-priced endowment.
If one bought a $2,000 twenty-year endowment at age twenty for $9.38 a month, it would be worth about $2,660 in twenty years, after which one is no longer insured. A $2,000 twenty-payment life policy bought at the same age for $5.60 a month would be worth about $1,360 in twenty years. One could take the money, or keep the $2,000 coverage, paying no further premiums after twenty years.
If one actually has an endowment, that word will appear on the policy. And one will be paying more for this type of policy.
Cutting Costs
Everyone would like to cut insurance costs without cutting out the policy. But is this possible to do? Yes, it is. And some respected insurance men say that this is really what you ought to do—in some cases.
These men advise the public to keep their whole life insurance policy six or seven years until the cash values are substantial. Then they advise lapsing the policy without taking out the money. By law, extended term insurance will keep one covered for as many years as specified in the table printed in one’s whole life policy. You will recall the case of the New York widow who collected $6,000 on the death of her husband from his lapsed policy.
Extended term insurance can run for many years if one’s policy is seven years old or older. A person with terminal illness, for example, could utilize this suggestion to help pay medical bills with saved premiums. But there are also other ways to cut insurance costs.
Is a person’s policy rated? For example, if he has been paying a penalty for being overweight and he has been normal weight for a year or more, he can ask to have the rating removed. This applies to any rated physical condition or handicap that has been corrected. It is worth a try.
Another way to cut insurance costs is to request a “reduced paid-up policy.” Under the table of cash values, one’s policy will show how large a paid-up policy one is presently entitled to. Of course, it will not equal the face amount of the contract. That is why it is called “reduced” paid up.
If you are shopping for life insurance, first estimate your family Social Security benefits should you die. They could equal many thousands of insurance dollars. Then look around for inexpensive group coverage. Try your employer or trade union. Postal workers, teachers, nurses, lawyers, electrical engineers, for example, can buy excellent group coverage at reduced rates.
For those living in New York, Connecticut or Massachusetts the answer may be savings-bank life insurance. This costs less because one is not paying for the services of a licensed insurance agent.
Once a person gets the kind of life insurance that he wants, he should form the good habit of paying premiums within the thirty-one-day grace period. If he is late and the policy lapses, the company is obliged to reinstate it up to three years after it has lapsed, but only if he proves to be in good health.
Another disadvantage in letting a policy lapse is that each reinstatement turns the clock back to the start of the two-year contestable period. After holding a policy for two years, it becomes incontestable. However, prior to the termination of the two-year period, any important omission uncovered as a result of a claim could void the contract. So, for such reasons, it is important not to let a policy lapse.
Life insurance should be treated as valuable property similar to a savings account, stocks or bonds. It takes some of the economic sting out of death. It can serve a useful role.