Life Insurance Definition - Part 2

It is obvious that Uncle Sam makes a great distinction between the living account values of a life insurance contract and the net amount at risk. It will help you to understand life insurance if you do the same. It becomes obvious that life insurance companies do not provide this net amount at risk without a charge. There is no free life insurance just as there is no free lunch. Every policy, new or old, that has a net amount at risk must charge for it. These mortality charges for the life insurance are taken from a policy each year either by extracting payment directly from the policy owner or by using a part of the account value or the return earned on the account cash value to pay those expenses.

You have come a long way in understanding if you have accepted our pragmatic definition of life insurance as being synonymous with net amount at risk, and have determined that you actually are paying the increasing cost for that at-risk portion each year as you age. You can equate this mortality charge with the cost of your term life insurance.

Most people are familiar with term insurance. They pay a specific amount of money for a specific amount at risk (i.e., life insurance) for a period of 1 year. At the end of the year, no excess premium is left over. To continue the policy, they must pay an additional premium for the next year. This is commonly referred to as yearly renewable term insurance. Knowing what this cost is for you is another step toward understanding.

Life insurance, or net amount at risk, is paid for each year by increasing mortality costs per $1000 of life insurance. All life insurance, including term life insurance, works exactly the same way. We can conclude, then, that all life insurance (net amount at risk, net coverage, excess over a contract's surrender value) is term insurance. All life insurance includes the cost of term insurance. The question is not, "What kind of life insurance is available and what should I purchase?" but rather, "I need life insurance. What is the best way for me to pay for it?"