Pick Life Insurance That Fits Needs

QUESTION: I have always pooh-poohed people who spend their money on life insurance. But my neighbor just started selling policies in his spare time and I don't know if I have the nerve to turn him down. Just so I know before he starts his pitch, what are the two types of policies (I remember from listening to my parents that there are two), is one more expensive than the other and which is preferable?--N. A.

ANSWER: When your parents were discussing the subject, there probably were only two types of life insurance: term and whole life. Now, there are three. The latest offering in the life insurance field is called universal life, which basically is a blend of term and whole life.

In terms of out-of-pocket costs, term insurance is by far the cheapest. A 50-year-old man who doesn't smoke can expect to pay about $200 a year for a $100,000 term policy ($400 if he takes out the policy for five years at a time instead of renewing every year), $2,500 or more a year for a $100,000 whole life policy and something in the vicinity of $1,800 for a $100,000 universal life policy.

Why the extreme difference? Term policies don't hold themselves up as a savings account paired with an insurance policy, as do the other two. All you get from a term policy is protection in the event of an untimely death.

Term insurance is particularly inexpensive for young people. The older you are, the more of a health risk you are believed to be and the more expensive your policy. Likewise, smokers are believed to be more of a health risk than nonsmokers, so smokers pay more for their term policies.

Which, if any, of these you should choose depends on your needs and your savings habits. Think of it as you would the differences between renting and owning a house. Some consumers consider rent the equivalent of throwing away money, while owning is an investment. But others would argue that they can make more money by paying less out of pocket for housing by renting and investing the difference in something that pays higher yields than real estate.

The same is true with life insurance. Some consider the money spent on term insurance an absolute waste because unless they die and there is a payoff, they've spent money and received nothing in return. Whole life or universal life is better, they would argue, because either gives them insurance protection plus an opportunity to save money and earn interest on that savings.

Others consider whole life and universal life equally wasteful because the premium that they have to pay for either isn't worth the measly--they would argue--amount of interest that either of these types of policies offer in comparison with other types of investments. This group of consumers would argue that their money is much better spent put separately into pure insurance and a pure investment instead of into a hybrid.

A term policy is probably not a good investment choice for some consumers who can't force themselves to save on their own. Taking out a whole life or universal life policy is a form of forced savings for such people and a better choice than not saving at all.

One note about universal life. It was designed to combine the best features of term and whole life insurance. But there are many naysayers who say it has failed miserably in that objective.

With universal life, the insurance premium payments are placed in an account and earn interest at rates considerably higher than whole life insurance earns. The cost of pure insurance and the various sales and administrative charges are withdrawn regularly from that account.

The benefits of buying such insurance are several. The cost of buying universal life doesn't increase as the policyholder ages or as his or her health deteriorates. And the yields offered by most of these policies is competitive with market interest rates.

But the problem, say detractors of this type of insurance, is that the sales charges and administrative fees can be astronomical--high enough in some cases to wipe out the amount a policyholder would recover if he or she canceled the policy anytime during the first 10 years of its life.

The lesson is this: If you're interested in universal life, ask detailed questions about the sales charges, administrative fees and the length of time that the guaranteed interest rate is good for. Often, the advertised interest rate is good only for the first year--a fact, say some consumer watchdogs, that insurers sometimes neglect to tell their customers.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.

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