WHAT IS LIFE INSURANCE, REALLY?

By Julius Lewis & Eric Ngiem

Life insurance is usually a topic of heated discussion. No one ever talks about it over the dinner table, but when asked, everyone has an opinion about it. Many feel as though they have no need for life insurance, including some who have children. This is an amazing notion. They feel that the world is their oyster and they have this immortal attitude of living forever. Others have this superstition that if they get life insurance, they’ve just placed a death sentence over their heads. And a few see life insurance as a necessary financial tool.

Despite the different opinions, one common thing that most share is their lack of knowledge about life insurance. Insurance is usually described as a product that is sold, not purchased. The knowledge that most have about insurance is from the 15 minute sales pitch or from water cooler talk at work. But, what is life insurance really?

Life insurance has many names and titles generated by the life insurance companies for marketing and sales purposes, but in reality, there are only two forms of life insurance:

l Term insurance -- pure death protection only.

l Term insurance -- combined with some sort of savings or banking element, such as cash value and/or dividends.

Term insurance is protection against loss of life during a specified period of time: usually a 10, 15, 20 or 30 year period. Once you’ve stopped paying, the coverage ends. Many people have this type of insurance because the premium rates are usually lower than a permanent life policy. Others purchase this type of insurance and “invest the difference” in mutual funds or stock. Many consider this as “temporary” insurance.

The combination of term insurance with a savings element is often referred to as “permanent” insurance. This not only gives you death benefits but also can provide a living benefit, which is a cash value side fund that can be used to withdraw or loan against. There are different variations of permanent life (e.g. whole, universal, variable and fixed, etc.). Usually, because of the savings element, the premiums are higher.

The term insurance inside the policies is designed to go out to age 100 or beyond. The savings element is a subject of much scrutiny in the insurance industry. Some companies use the smoke and mirrors of dividends as investments, while others use the equities market such as indexes or mutual funds. The most common are fixed accounts, where interest rates are directly tied to the company’s investments.

In a nutshell, despite the types of life insurance that are available, the essence of life insurance is a contract between you and the company, where you promise to pay your premiums and the company promises to pay the death benefit upon your death to your beneficiary or beneficiaries. For more information, e-mail us at:

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