Getting all the life insurance you're paying for? Reprinted from MEDICAL ECONOMICS, December 6, 1971. Copyright 1971 by Medical Economics, Inc., a subsidiary of Litton Publications, Getting all the life insurance you're paying for? Probably not, this physician suggests. Twice burned by method of calculating the true cost of coverage. His price By H. Thomas McSwain, M.D. Thoracic surgeon, Dallas, Tex. "You get what you pay for," runs My experience has been pret- Both agents came well recommended and worked for companies with good reputations. Yet both sold me insurance at a price about 10 times higher than I would have paid for another kind of policy that would have provided the protection I wanted. That kind, a variety of pure term insurance, is known as yearly renewable term. The premium for 20-payment life at age 35 is about $30 for each $1,000 of protection. For yearly renewable term, the premium is $3 or less. In the event of death, which is what the policyholder is insuring against, both deliver $1,000 to the beneficiary. Then why would anyone buy the more expensive policy? The an swer, I believe, lies in the ignorance of the buyer-an ignorance all too often cultivated by the insurance agent. Since my two brushes with recommended agents from reputable companies, I've done some studying. My conclusions: To begin with, the very expression "life insurance" is a mis nomer. As one admirably direct insurance advertisement put it: "We all have to die Therefore. there is no way to insure our life - there can only be insurance against our untimely death." And it is to share that risk of premature death with others that life insurance is best applied. The cost of insurance in creases with age. And in spite of what he may be told, the insur ance buyer can't beat the mor tality tables by taking out his policy when he's young. He simply spreads the payments out over a longer period. Neither can the prospective policyholder win by buying insurance with the mystical lure of "cash Calculating the actual cost of life insurance Most ways to figure life insurance costs are designed to compare policies that differ only slightly--Company A's ordinary life policy with Company B's, for example. But the system Dallas surgeon H. Thomas McSwain describes in the accompanying article is specifically designed to compare dissimilar policies. In the example here, it is used to compare an ordinary life policy with the same company's five-year renewable term policy. The key factor in McSwain's approach is that he insists life insurance be assessed strictly in terms of the cost vs. the payout in the event of death while the policy is in force. In the example on the opposite page, covering a man who takes out insurance when he's 35, the cumulative cost of term is less than that of straight life almost until the term policy expires at age 65. Literally overnight, however, the over-all cost of the straight life is cut almost in half as you walk away uninsured-just as with the term policy-but with the cash value in your pocket. In effect, you've won your bet with the insurance company, a bet you have a 70 per cent chance of winning, according to spokesmen for the insurance industry. On the chart, the cash value is charged with an interest factor, on the assumption that the policyholder could earn 6 per cent on his money if it weren't tied up in the cash value. True, the insurer credits some interest (typically, 2 to 3% per cent) on the cash value. But that interest won't be available to the beneficiary if the policyholder dies while the insurance is in effect; only the policy's face amount will be paid in that case. The insurance policy must be cashed in before that "inside" interest buildup is going to be of any benefit to the policyholder and his family. Effectively, the insurance company is risking only the difference between the policy's cash value and the face amount if the policyholder dies while the insurance is in effect. Thus, the true amount of protection shrinks steadily as the policy's cash value builds up, and the real cost of straight life, rising just as steadily, eventually reaches three times the amount billed on the premium notice. |