Understanding Life Insurance - Part 1

Have you ever heard anyone say, "I just can't understand life insurance?"

Have you ever heard anyone say, "I just can't understand life insurance?" What is disturbing is that this attitude is prevalent not only among the public but also among many professionals in the financial services industry. They say it as a matter of fact, as if the situation couldn't be changed. Their eyes say, ". . . and you can't make me understand it." We have to eliminate this attitude in our advisors and ourselves if we are to be intelligent consumers of life insurance company products.

Doing so might be easier if we understand the origin of insurance. Term insurance is not the problem. We all can understand that if we pay a premium and die, our beneficiary receives a death benefit. The problem occurs when we put more money into a policy than what is needed to cover the cost of the death benefit. For the first 150 years that insurance was in existence, the whole life policy was the only type of policy that could accept more than the amount required for term insurance.

The insurance company would tell a prospective client how much was required each year for a specified death benefit. What happened to that money? What were the costs? What was the investment or the return on that investment? None of that was disclosed-it remained a mystery. In fact, the favorite response to the question regarding the money in a whole life policy was that the money was not an investment. "Life insurance is not an investment" are words that flow easily off the tongue, and certainly the statement is true when you consider term life insurance.

Term insurance is not an investment. It is a commodity that you pay for like auto insurance; it provides protection for a specified period of time. However, can we say the same thing about the money in a whole life policy? The policy owner's capital is voluntarily left in the policy "in order to gain profit or interest," which is the definition of the word invest according to the American Heritage Dictionary, Second College Edition.

To sum up the problem, the financial world and the consumer are having difficulty trying to figure out the investment and the investment return on the cash value in a whole life insurance policy. At the same time, the insurance industry denies whole life is an investment while many salespeople are trying to prove that buying cash-value life insurance is better than buying term life insurance and investing the difference. It's no wonder many people throw up their hands in despair and cry, "I can't understand life insurance. . . and don't intend to try!"