The question is, are the benefits of life insurance worth the high premiums? The answer is yes, but then again, it depends upon age and other conditions like health that could affect the premium, and what need the individual has to create an estate in the event of an untimely death. To make an intelligent decision on the matter, it is important that a person has a basic knowledge of how life insurance is structured in order to determine the pure cost of the life insurance.
The cost of life insurance is based upon actuaries which are statistics of risk based upon age and health related matters, etc. As a person ages, the statistics determine that the risk increases. This is why life insurance for a 21 year old non smoker in good health is so cheap, whereas someone in their 60’s that smokes like a freight train would pay a small fortune for the same amount of coverage.
The purpose of life insurance is to create an estate if the insured dies prematurely, in other words, before he/she has created his or her estate. This simply means that concurrent to making premium payments, it is assumed that an estate is being built. This is the reason why many life insurance companies have bundled savings with insurance, calling it ‘whole life’. The amount of the insurance decreases while the savings portion increases, and assuming the insured continues to make the payment, the policy at a given time, or end of the policy, ‘matures’. This simply means that there is no more insurance, but the policy has a cash value which is now the created estate. The face amount of the savings plus the insurance keeps the ‘death benefit’ constant throughout the term of the policy.
If a person wants to buy ‘pure’ insurance, they will buy ‘term’ life insurance. Term policies are structured just about every way imaginable, but one law is constant, and that is, the cost of the insurance is based upon the actuaries, or the risk. The savings portion of the insurance as described in a whole life policy is not factored in.When as person buys term insurance, it is assumed that they are doing something independent of his or her life insurance to create an estate such as an IRA or other investments.
The most common type of term insurance is a simple decreasing term policy. Let’s say that the whole life policy mentioned above was to mature in thirty years. As the savings increases, the amount of the insurance decreases, making the face value of the policy (the savings and the death benefit) a constant amount. So in reality what do you really have? A decreasing term policy!
It is now assumed that the 21 year old in our example above wishes to be insured in the event of an untimely death, but also wishes to begin building or creating an estate. Great idea! He/she may wish to bundle it together, or keep the two separate. Do the math. Figure out what you can do in some investment program. And then just purchase pure term life insurance.
But it is also assumed that the 60 year old has already creates such an estate, which would eliminate the need for the insurance. If they did not create that estate, of course the cost of insurance for that purpose will be more. So for that person, it may not make much sense for them to be paying $200.00, $300.00 a month for insurance.
Each person has to balance out what works best for them. The thing to keep in mind that insurance is insurance, and savings is savings. Don’t confuse the two definitions! That way, you will always know the cost of the pure insurance, and can make an intelligent decision concerning your needs.