FCS 3400
Basic Types of Life Insurance

There are two basic types of life insurance: term and cash-value.

With term insurance you pay a modest premium for coverage over a specified period of time - the term. If you die before the end of the term, your beneficiaries receive the face value of the policy.

Cash-value insurance costs much more than term, but provides of lifetime of coverage and a "savings account." If you decide that you no longer want life insurance, you can quit paying and receive the "surrender value" (cash).

Here is an overview of term and cash-value insurance:

Term Life Insurance	Cash Value Life Insurance
Inexpensive compared with a cash-value policy	Typically costs 10 times more than term for the same face value
Pays sufficient death benefit to insure financial security for the family	May pay no higher death benefit than a comparable term policy
Covers only a specified time period	Typically provides coverage for life
Not an investment instrument - no cash value	Builds cash value (although often with relatively low returns
May not be renewable when the term ends (don't buy it unless it is renewable!)	Stays in force as long as you pay premiums
A new term policy will have higher premiums than your old term policy (because you are older)	Premiums stay the same your entire life
Provides no tax advantages	Can be used to pay or escape estate taxes
Pretty easy to understand	Very complex and hard to understand
Few (or no) commission costs and fees	Significant commissions and fees

Term Insurance

Term life insurance is life insurance for a specific period of time. You decide the size of the death benefit and pay the agreed-upon premiums. Many insurers sell policies with terms up to 30 years. If you expire before your policy does, you win (if you can call death winning). Your beneficiaries get the full payout. If you outlive the term of the policy, you are no longer covered. You can buy a new term policy, but the expired policy is finished.

Advantages	Disadvantages
Inexpensive	No cash value
Pays enough to provide financial security	May not be renewable when term ends
Widely available	New policy will cost more than your old policy
Can be purchased for desired length of time	Provides no tax advantage

Cash-Value Life Insurance

A cash-value policy is designed to last a lifetime. With a premium often averaging $4000 per year for a healthy 40-year-old, it is far more expensive than term life insurance.

Cash-value life insurance is a hybrid that combines insurance and a conservative investment. Consumers often become confused because many of the details of the policy are kept secret.

For example, when you purchase a cash-value policy your agent is NOT likely to tell you how much of the premium cost will be paying for insurance and how much will be invested. Chances are the agent won't tell you because he doesn't know...and even if he did, he wouldn't want to tell you. You see, cash-value life insurance is the "bread and butter" of the life insurance industry. Agents make their money on commissions and commissions on cash- value policies are much higher than on term policies. The agent typically gets 1/2 of your first year's premium as his pay and 10% of the next five year's premiums.

Because the premiums are so high, about 17% of consumers who purchase a cash-value life insurance policy cancel it within the first two years. This is a VERY expensive way to get two years of coverage. (Remember that the premiums are so high because you pay a higher premium during the early years so that you don't have to pay an even higher amount in your "golden years." When you do not keep the policy for "life," you have ALWAYS overpaid for the years you held the policy.)

A portion of the higher premium associated with cash-value life insurance is invested on your behalf. You build a balance - a cash value that can be redeemed if you want to give up the policy.

Advantages	Disadvantages
Builds cash value over the years	Typically costs about 10 times more than term
You can cancel the policy and collect the surrender value	Very complex and difficult to understand
Typically provides coverage for life	Not an terrific investment vehicle (poor return on your money)
Can help the rich escape estate taxes	High commission and fees

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