Life Insurance – Learn From an Old Agent
Life Insurance is an insurance product that pays at the death of the insured. It really should be called “Death Insurance,” but people don’t like that name. But it insures the death of an individual. Actually, what is insured is the economic loss that would occur at the death of the person insured.
Those economic losses take a lot of different forms, such as:
- the income stream of either “breadwinner” in a family
– the loss of services to the family of a stay-at-home-mom
– the final expenses at the death of a child
– final expenses of an individual after an illness and medical treatment
– “Keyman” coverage, which insures the owner or valuable employee of a business against the economic loss the business would suffer at their death
– estate planning insurance, where a person is insured to pay estate taxes at death
– “Buy and Sell Agreements,” in which life insurance is purchased to fund a business transaction at the untimely death of parties in the transaction
– Accidental death insurance, in which a person buys a policy that pays in case they die due to an accident
– Mortgage life insurance, in which the borrower buys a policy that pays off the mortgage at death – and many more.
Life insurance has been around for hundreds of years, and in some cases, has become a much better product. The insurance companies have been able to develop mortality tables, which are studies of statistical patterns of human death over time…usually over a lifetime of 100 years. These mortality tables are surprisingly accurate, and allow the insurance companies to closely predict how many people of any given age will die each year. From these tables and other information, the insurance companies derive the cost of the insurance policy.
The cost is customarily expressed in an annual cost per thousand of coverage. For example, if you wanted to buy $10,000 of coverage, and the cost per thousand was $10.00, your annual premium would be $100.00.
Modern medicine and better nutrition has increased the life expectancy of most people. Increased life expectancy has facilitated a sharp decrease in life insurance premiums. In many cases, the cost of insurance is only pennies per thousand.
There is really only one type of life insurance, and that is Term Insurance. That means that a person is insured for a certain period of time, or a term. All of the other life insurance products have term insurance as their main ingredient. There is no other ingredient they can use. However, the insurance companies have invented many, many other life products that tend to obscure the reasons for life insurance. They also vastly enrich the insurance companies.
Term Insurance
The most basic life insurance is an annual renewable term policy. Each year, the premium is a little higher as a person ages. The insurance companies designed a level premium policy, which stopped the annual premium increases for policyholders. The insurers basically added up all the premiums from age 0 to age 100 and then divided by 100. That means that in the early years of the policy, the policyholder pays in more money that it takes to fund the pure insurance cost, and then in later years the premium is less than the pure insurance cost.
The same level term product can be designed for terms of any length, like 5, 10, 20, 25 or 30 year terms. The method of premium averaging is much the same in each case.
But this new product caused some problems. Insurers know that the vast majority of policyholders do not keep a policy for life. Consequently the level term policyholders were paying future premiums and then cancelling their policies. The insurance companies were delighted because they got to keep the money. But over time, they developed the concept of Cash Value.
