Life Insurance Policy

Insurance is not an Investment

A so-called life insurance policy is really a death insurance policy, but carriers prefer the former to the latter because life sounds a whole lot better than death. It is a contract between the policyholder and the insurance company. It is not an investment. If someone wants to invest, life insurance is not an investment choice or a substitute for investment. It is not comparable to investment.

Under the life insurance policy, the insurer promises to pay a specified amount to the beneficiaries of the policy upon receipt of proof of the death of the insured and a completed claim form, surrendering the policy. In return, during the life of the insured, the policyholder makes specified payments, called premiums, either periodically or in a lump sum.

So life insurance is a promise to pay a sum of money when you are dead, either dead period for permanent insurance, or if you die within the limited period of coverage for term life insurance. In contrast, with investments, you hope to make a profit while you are alive. So investment and insurance stand in contrast to each other, not in comparison.

Please Read the Policy

Since a life insurance policy is a contract, it is important to read it even if you don't want to. There is a "free look" period of ten days or so after receiving the policy, depending on state law and policy provisions, in which you can return the policy and have all initial payment returned.

Even the simpler term type of life insurance policy has provisions you should understand and be sure that you have received what you expected. Is the face amount (death benefit) and term of coverage correct? If the right to convert to a permanent life insurance policy at the end of the term might be important later on, be sure you understand what guarantee the policy is offering. There are variations.

A permanent policy may have illustrations of projected investment or interest earnings performance. There may or may not be guarantees of mortality charges, level premium, non-forfeiture surrender value (cash value), and factors affecting face amount. If you ordered certain optional extras, are they included in writing? Make sure that you have what you believed you were buying.

History of Life Insurance

In North America, the first life insurance company began in 1759. The industry grew rapidly in the 1840's as the growth of commerce in the US accelerated. However, in the depression beginning in the 1870's, over half of the insurers failed. Regulation progressively increased in each state resulting in this being a highly regulated industry.

Today, most life insurance companies are for-profit companies owned by shareholders, with a small number of mutual companies owned by policyholders, and an even lesser number of fraternal companies.

Early life insurance sold to the general public in the U.S. was designed for a limited number of years, i.e., term insurance. The premium would increase as the insured aged and the risk of death and payment of the death benefit increased, similar in principle to annual renewable term. The other alternative was a type of decreasing term where coverage decreased over time in return for a fixed periodic premium.

Because that policy design is so limited in its scope, many other forms of coverage have developed over the years to fulfill the needs of different situations.

Types of Life Insurance

The most commonly purchased life insurance is still term. However, unlike the original form, it is now available for a guaranteed level premium for a specified number of years in five year increments up to thirty years.

Since there is a need in some cases for insurance that does not expire at the end of a term, various ways have been devised to fund permanent insurance that will pay a death benefit no matter when the insured dies.

Whole Life Insurance

The first permanent policy form was called "whole life" because premiums were payable for the insured's whole life. A higher premium than term was necessary so that an internal savings account would build up a cash value at compound interest tax free. This was not done to provide the policyholder a savings account to borrow against, but to reduce the net amount at risk for the insurance company.

As the account value increased, the difference between the account value and the death benefit would decrease until it became zero at a certain age, typically age 95 or 100. By reducing the amount at risk, the insurance company could issue a life insurance policy where the death benefit is a guaranteed "when" instead of "if", while maintaining the financial integrity of the life insurance operation. The individual life insurance policy itself grows to be increasingly self-supporting, giving more financial security to the insurance company compared to just paying claims out of a general pool of premiums collected.

Variable Life Insurance

In order to provide the opportunity to boost the value of the account in a permanent insurance policy, variable life was introduced. A variety of investment options is offered by carriers, some managed by the insurance company, some using outside managers. Either way, there are management fees that reduce returns to some degree. Various mixes of mutual funds are offered such as small cap, index, precious metal, global, and bonds.

Even though these sub-accounts for investing the pre-payment of premium can be chosen by the policyholder, that does not make this an investment. Variable Life is still all about life insurance. These investment choices are just an attempt to boost earnings of an insurance prepayment within an insurance policy.

Flexible Premium Universal Life

When current interest rates were high in the 1970's, whole life policies seemed to be poor performers because they are designed using long term interest assumptions. A temporary spike in interest rates could not be used as the interest rate basis for a long term policy. In an attempt to incorporate current interest rates, a new permanent policy design evolved, Universal Life.

Universal Life does not need to use the same long term interest rate assumptions that must be used in Whole Life to enable its guarantees of fixed level premium and fixed face amount. Since the cash value is usually invested in short and intermediate fixed-income instruments, its returns fluctuate more than a whole life policy whose account is invested in long term bonds and mortgages. Because of the short term nature of its investments, overly optimistic illustrations of universal life policy performance have disappointed many buyers.

Level Premium Universal Life

Starting with what would otherwise be an ordinary Universal Life policy with its limited guarantees such as guaranteed minimum interest rate earnings, a secondary or no-lapse guarantee is added by some insurers to produce a guaranteed level premium Universal Life. The premium for guaranteed level premium Universal Life is significantly less than Whole Life.

Quotes for this guaranteed level premium product is included in our online quoting system of over 120 top life insurance companies.

Life Insurance Quotes