Life insurance

OK, you're not a kid any more. (Name that tune.) You've got to think about the family and responsibility and all that crap you said you'd forswear. You're going to have to buy some life insurance. What kind should you get? Here is a brief overview.

• The stuff they offer you at work. It's fine. Take it. But you also need some that you own so that when you change jobs, as you will, you don't have to worry about what happens to that stuff at work. It's just cheap group rated term insurance and it's only good while you work at that job, usually.

• Term Insurance. This is what Consumer Reports wants you to buy. They are a bunch of liberal woosies, but they could be right on this one IF: You can't afford anything else. And if you have more responsibilities that your age would suggest. (This means you've knocked up your old lady three times in three years and you ain't even 25 yet.) Term insurance is cheap while you're young and healthy, but it builds no equity and it gets more expensive as well as runs out altogether at some point when you get older. It's like buying "pure death protection." It's still a hell of a lot cheaper than credit life and some other rip-offs out there.

• Permanent Insurance. This comes in different forms, such as Whole Life, Universal Life, Variable Life, etc. But it all boils down to this: It costs more going in, but you will have the coverage for your entire life at that price and you will also build up equity, just like in your home, that you can call on in emergencies. It's like owning property instead of just renting death protection. Whole Life is like investing in the insurance company itself. Universal Life is like investing in a Money Market. Variable Life is like investing in the Stock Market. But, either way, you'll come out way ahead in the long run if you start with this.

In any case, try to buy this while you're young and healthy. You don't want to be realizing that you should have been owning this when you are past the point of cheap rates.

What is it, though? It is, quite simply, insurace on your life. In the same way you have Collision Insurance on your Automobile in case anything happens to it, you can put insurance on your life in case anything happens to it.

By 'happens' I mean, of course, you happen to 'lose it'.

So, if you have life insurace, and your life ends, you get money? No, of course not (unless you're crooked), that would be too easy, you stiff! No, if you die, your life insurace goes to whomever you said it should go to when you took out the policy, usually a spouse or children.

The idea on "money upon death" was originaly put forth to pay for burial expenses (assuming you weren't simply going to dumped in the Thames). It has, however, evolved into much larger sums that are intended, in the case of the primary breadwinner taking a dive, you sustain the family until another source of income can be found.

What is life insurance?

Life insurance is a type of private insurance* designed to protect against two risks: premature death and superannuation (just getting too old). For most people, death at any age is considered premature; "too old" is usually defined in terms of the individual's self-sufficiency or ability to sustain an income.

Types of Life Insurance

There are two sweeping categories for life insurance: term and cash value. For this writeup, term is term and everything else is cash value.

Term Life

What it is:

Insurance in its purest and simplest form. You ask that a set amount of money be paid to some designated beneficiary in the event of your death, and pay a monthly or annual premium. Renewable term policies include a contractual clause guaranteeing the insured the right to renew their policy for a certain number of years without having to prove insurability. Convertible term policies include a contractual clause guaranteeing the insured the right to convert the policy into some type of permanent policy, such as whole life, without having to prove insurability.

Several optional features are offered with term life contracts. One of the most common is disability coverage - amusingly enough, it's essentially insurance for your insurance. For a slightly increased premium, in the event you become disabled (temporarily or permanently), the insurance company will take over your premiums and keep your policy current so it won't lapse. I almost passed up on this feature, but like many grown-ups love to say, the insurance agent told me "Hey. You're young, but you don't know what will happen five years down the road." For $1-$5 a month, the disability coverage tends to be a good value.

Advantages:

Term life typically has the lowest cost for the highest coverage of any life insurance policies out there. It can help a younger person preserve a low premium and start a permanent policy later in life at lower cost.

Disadvantages:

The policy's temporary nature. If all you purchased was term life and when you're 60-something and for some bizarre reason you lose your term policy, you're left with nothing. Term life is temporary, and should be used for temporary needs.

Types of People who Generally Benefit from this Policy:

Younger people with lower incomes and a great deal of financial responsibility (mortgages, children). Used often by individuals wishing to guarantee insurability in the future. Policies taken out on children to cover burial expenses tend to be term policies.

Whole Life

What it is:

The most common type of cash value insurance. Whole life is attractive to many people because it combines protection and savings. In straight whole life policies, premiums are payable for the lifetime of the insured (until age 100). In addition to the death benefit, funds accumulate from the premiums paid in, and the policy can be later used as a retirement fund. Other types of whole life include limited-pay whole life (premiums are only paid for a limited period of time) and single-premium whole life (only one premium is paid).

Advantages:

Permanent funds are accumulated for permanent needs. The insured may borrow against the savings element of the policy in case of an emergency. Also, the savings element may be used to pay future premiums, but this feature should only be used as a last resort.

Disadvantages:

The biggest disadvantage is in the insured not being familliar with his/her own needs, and using whole life to cover a risk for which it wasn't designed, such as a temporary risk. Also, when you borrow against the savings element of a whole life policy, you are obligated to pay an interest rate. A common question that comes up is Why should I have to pay an interest rate if I'm borrowing against myself? Answer: There's an opportunity cost to the insurance company for loaning the money to you. The insurance company would have taken all that money you'd been paying and made interest on it somewhere else, so they figure you should have to pay it if you're taking away that opportunity from them.

Types of People who Generally Benefit from this Policy:

Just about everyone can benefit from this kind of policy because of the savings element. I keep hearing from finance professionals that are strewn about my college speaking to classes and trying to recruit the children there that whole life policies are crap, just "buy term and invest the difference" (in a mutual fund or other investment). Of course, I personally feel that even the finance industry is not immune to trends and fads. This stinks of whole life simply not being trendy right now. Even more likely is that these yahoos are selling competing investments and are just making a pitch. You ought to know what interest rates you'd be getting elsewhere and whether the whole life policy is a good idea, but without a doubt, retirement saving rocks.

BEWARE!

Lemme tell ya a story. One summer I worked for an insurance agent as a personal assistant. The dork actually tried to turn me into a client, and started relentlessly pushing whole life in my face, even though I was 19 and making $8 an hour. It should have been clear to anyone that I could not afford the larger premium required to start a decent policy. Many agents are offered twice the commission on whole life policies as they are on term life policies. You simply must be familiar with the types of policies that are out there and what you really need, or you will get pushed into something you don't really need.

Endowment Policy

What it is:

You win if you live AND you win if you die! This is an increasingly popular policy (overseas) because the insurer pays out the face value if the insured dies OR at the end of the specified period (10-30 years) if the insured survives the period. The face amount of the policy is often referred to as the sum-assured. In a with profits endowment policy, funds accumulate, and the profits are paid out at the end of the period (or at death) with the sum-assured.

Advantages:

The win/win scenario.

Disadvantages:

Obscene premiums. Endowment policies do not count as life insurance in the US because the premiums required far exceed the amount required to cover the death benefit. They are popular overseas, however, and are frequently traded on the market (just search the Internet for "endowment policy").

Types of People who Generally Benefit from this Policy:

These policies are purchased more as an investment than an actual life insurance policy, so it's hard to say that anybody would benefit having this policy as life insurance. The premiums are simply too high.

Variable Life Policy

What it is:

A type of whole life policy. The insured has the power, in this case, to direct where the funds are invested and bears the investment risk in the form of fluctuations in the cash value and death benefit. The premium is fixed, but the face value of the policy moves up or down, depending on the market and the canniness of the insured. The insurance company will offer a wide variety of investment choices, such as stocks, bonds, and money market funds.

Advantages:

Investing in stocks gives the insured great potential for rapid gain in the policy. So in the mid 90s, these policies were nothing but advantages.

Disadvantages:

And then the markets crashed.

Types of People who Generally Benefit from this Policy:

People who get a thrill out of playing with their money gravitate toward these kinds of policies. This policy further fuzzes the line between life insurance and investment.

Universal Life Policy

What it is:

Universal Life was invented in 1979 by Hutton Life. It is a variant of the whole life policy where the premiums, cash values, and death benefit can be adjusted up or down at any time depending on the insured's needs.

Advantages:

The interest on the cash value of the account is usually subject to a minimum, something life 4%. The policy was designed as a cure-all for individuals unsure about their financial future. The flexibility of these policies is a major plus.

Disadvantages:

Insurance companies sometimes set minimum levels for the amount of coverage, but it is possible to find an insurer who offers as little as $25,000 coverage.

Types of People who Generally Benefit from this Policy:

Lots of people! This policy is very similar to a whole life policy, with the added flexibility bonus, so it tailors itself to satisfy the needs of many policyholders.

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*Private insurance is characterized by the transfer of risk from individuals and organizations to professional risk bearers (insurance companies). It is different than social insurance or other programs offered by the government.

Source: Mandi, her education significantly fleshed out by a course titled 6F:102 - General Insurance at the University of Iowa.

Please don't go out and buy a policy solely on this information. Insurance agents can be scary, but most of them are very nice and knowledgeable and can help you select the type of insurance that is correct for you. It helps to be armed with this info (and more, besides) when you go shopping for it, however; it becomes infinitely easier to sniff out a bad deal or sleazy agent.

So, I'm talking to an insurance agent in my office, and about two months ago he received a claim in regards to a man (freshly divorced from his wife) who had hung himself. In addition to her ex-husband shaking hands with the veritable eschaton, she now got the additional bonus of a cool hundred grand.

Now, if you've (thankfully?) never been the beneficiary of a Life Insurance jackpot, in many cases a representative of the company will give to you a not-too-atypical "checkbook" from which to withdraw funds as you see fit (e.g., loan repayment, childcare bills, hookers). It's as simple as that.

Now, the aforementioned agent was hoping to talk her into rolling some of that money into policies for her children, and finally was able to catch her while she was at work. She said she couldn't really talk to him about it at that time, because work was quite hectic that day. She went on to say that they were also short people at the office, and that her position, as head of sales, was taxing her a great deal today.

Now, the agent (not the most thorough, I'm afraid) had never inquired as to her line of work. Building on the new information of her being in sales, he went on to ask her, essentially, what she was involved in selling.

Her reply was a slice of the best piece of irony I've enjoyed in some time; she told him, quite matter-of-factly, that she was the Sales manager for a company that manufactures and distributes ... ... ... rope.