Consumer’s Guide to a Better Understanding of Life Insurance
Life Insurance, by definition, can be explained as follows: A plan
under which large groups of individuals may equalize the burden of
loss from death by distributing funds to the beneficiaries of those
who die. Life insurance, for an individual, is a way an estate may
be created immediately for one’s heirs and dependents. Countries
where life insurance seems to be most accepted include: Canada, the
United States, Belgium, South Korea, Australia, Ireland, New
Zealand, The Netherlands, and Japan. Generally, speaking, the face
value of policies in force, within these countries, well exceeds the
country’s national income.
During the turn of the twenty-first century, nearly $21.3 trillion
dollars of life insurance was in force within the United
States. Assets of more than nine hundred United States life
insurance companies totaled close to $3.1 trillion dollars, making
life insurance one of the largest institutions of savings in the
United States. This fact is also true of other prosperous countries
where the product of life insurance has become an important way to
save (and invest) making significant contributions to the national
The product of life insurance is not used readily in countries
considered less prosperous economically; however, acceptance of the
product is on the rise.
The major types of life policies include term, whole life, and
universal life. Combinations of these basic policies are sold in
high numbers or volume.
The simplest of these contracts is term life insurance. The policy
is designed to be issued for a set number of years. The protection
under these policies expires at the end of a specified period and no
cash value remains upon expiration of the contract.
Whole life contracts run for the entirety of the insured’s life with
the gradual accumulation of a cash value. The cash value of the
contract is less than the face value of the policy and is paid to a
policy holder when the contract reaches maturity or is surrendered.
Universal life policies are relatively new. The contract was
introduced into the United States in 1979. The policy has become a
major class of life insurance. The contract allows the insured the
flexibility to decide the size of the premium and amount of benefits
within the policy. The insurer charges (the insured) each month for
general expenses and mortality costs, crediting the amount of
interest earned to the insured. There are two types of universal
life contracts: Type A and Type B. In Type A policies, the (death)
benefit is a set amount, and in Type B policies, the (death) benefit
is a set amount plus any cash value that has accumulated within the
Life insurance may be classified in accordance with type of
customer. The classifications include: ordinary, group, industrial
The ordinary life insurance market includes customers of whole life
products, term life policies, and universal contracts. The market is
made up primarily of individual purchasers of annual based premium
The group insurance market is mainly comprised of employers who set
up arrangements for group contracts with the purpose of covering
The industrial insurance market is made up of individual contracts
sold in small amounts. Premiums are collected on a weekly or monthly
basis from the insured at their home.
Credit life insurance is normally sold on an individual basis,
generally as part of an installment (purchase) contract. The seller
is protected for the balance of any unpaid debt if the insured dies
before the completion of the installment payments.
Insurance may be issued with premiums set up (for payment) in two
different ways. The premium may remain the same throughout the
premium paying period; or the insurance may be issued with a policy
that provides for a periodic increase in premium relative to the age
of the insured (individual).
Almost all ordinary life policies are issued with a premium that is
the same throughout the payment history of the policy. This makes it
necessary to charge more than the actual cost of the insurance in
the earlier years of the policy. The necessity of charging more than
true cost is to make up for higher costs down the road. Therefore,
the additional charges in the earliest years of the contract are not
technically overcharges, but an essential element or part of the
total insurance plan. This establishes the fact that mortality rates
increase with age. The policyholder does not overpay for protection
due to the claim on accumulated cash values during the early years
of the policy. The policyholder at his or her discretion may borrow
against the cash value of the policy or totally recapture the value
by allowing the contract to lapse. The insured does not, however,
have a claim on any earnings accrued (over time) by the insurance
company through the investment of funds paid by its policyholders.
An insurer is able to provide many different types of policies by
combining term life insurance and whole life insurance. Two examples
of package contracts are the family income policy and the mortgage
protection policy. In each package a primary policy type, generally
whole life is combined with term insurance and calculated in such a
way that the amount of protection continues to decline during the
duration of the policy. Mortgage protection insurance is designed in
order that the (built-in) decreasing term insurance is approximate
to the amount of mortgage remaining on a property. In other words,
as the mortgage is paid down, the amount of insurance declines
accordingly. The declining term insurance expires at the end of the
mortgage period, leaving the base policy still in effect.
In similar fashion, the family income policy provides decreasing
term insurance within the package in order to provide a specified
income to the beneficiary over a period equivalent to the period of
time when the dependent children are young.
Some whole life policies allow the policyholder to place a
limitation on the period during which the premiums are to be
paid. Examples of this include: Twenty year life policies; thirty
year life contracts, and life policies paid to age sixty five
(65). The insured initially pays a higher premium in order to
compensate for the limited premium paid in the future. At the end of
the stated paying period, the policy is declared to be “paid up,”
however policy remains in effect until death or the policy is
Term life policies are adequate when the need for protection is for
a specified period of time. Whole life policies make the most sense
when the need for protection is permanent.
The universal life plan earns interest at a rate approximately equal
to rates available on long term bonds and thus can be used as a
convenient savings plan. In addition, the insured may adjust the
death benefits as needs change. The policy offers the owner cost
savings in the way of commission expense providing flexibility for
the insured by eliminating any necessity of canceling one policy and
purchasing another when the insured’s requirements change.
In conclusion, life insurance contracts offer many options for each
individual circumstance. Therefore, it is always best to consult an
insurance advisor when shopping for life products.