How to Evaluate Costs of Life Insurance Programs
By Erik S. Sherman and Zak Mann
Have you seen advertisements on TV that offer life insurance at unbelievably low cost — perhaps only a few dollars per month? Maybe you wonder what they aren’t saying about deals that sound too good to be true.
Or, have you seen news reports claiming that the least expensive kind of life insurance is always term? If that’s true, why are so many people paying higher premiums to own such popular “permanent” policies as whole life?
Confusion runs rampant in making meaningful comparisons of life insurance costs. But you have a tool available that will allow you to compare the cost of just about any life insurance coverage on the market — apples to apples, dollars to dollars. When you apply this tool (discussed later in this article) in tandem with an understanding of your personal needs, you’re on the right track to successful life insurance shopping.
Understand the Differences
The first point to understand about life insurance costs is the difference between “affordable” and “economical.” Term life insurance is almost always the most affordable for people on tight budgets because it requires the lowest outlays or “premiums,” especially at younger ages. However, with term insurance, you pay only for a death benefit. In permanent types of insurance — such as whole life — part of your premium goes to build cash value. You can then use dividends accumulated cash value to pay premiums in some cases, or you may borrow against it or withdraw it. Premium payments are always required in term and permanent insurance policies; however, the premiums in permanent policies are not always paid out of pocket. You can then use any dividends accumulated under the policy to pay premiums in some cases, or you can borrow against the cash value or withdraw against it. Of course, dividends are declared at the discretion of the issuing company and are not guaranteed.
In every policy, you pay a cost for “pure insurance coverage” to purchase a death benefit, and this is where economies can be compared. In term insurance, your premium equals the cost of coverage. But in permanent insurance policies this is not the case, because of cash value build-up.
The life insurance industry has developed a tool to help you determine cost of coverage. Called “net surrender cost index,” it is included by most companies on their “illustrations” of hypothetical policy benefits. This index assumes that you “surrender” a policy at the end of a pre-determined period and take back any cash value, accumulated dividends or other benefits. It then calculates your net cost on a time-weighted basis to allow an apples-to-apples comparison of actual life insurance coverage costs over time.To apply this tool, just request illustrations on competing policies and compare the net surrender cost index over a period of years that matches your need for life insurance. (The 20-year index is often used as a benchmark for comparing costs on life insurance illustrations.)
Cost Isn’t Everything
The net surrender cost index will help you compare dollars spent on coverage, but there are other features to consider, too. One is the quality and financial strength of the life insurance company, which is reflected in ratings assigned by A.M. Best, Standard & Poor’s and others. Another is the guaranteed coverage period. Some term insurance policies can’t be continued beyond age 75 or 80, while coverage under a whole life policy is for the life of the insured. Also important is the quality of professional service that assists you in reviewing and revising your program. The cheap term policies advertised on TV are usually “do-it-yourself.” On the other hand, many other life insurance policies offer the valuable continuing service of a financial
Before choosing a life insurance deal at rock-bottom prices, consider the advantages of asking a professional to help you compare choices and costs, while coordinating your life insurance coverage with other financial needs. That’s where you’ll find the real economies over time.
By Erik S. Sherman
National Planning Corporation