Life Insurance


For millions of Americans, life insurance means protection against financial need. Life insurance can provide support for a family in the event of a father's or a mother's death, funds to meet the cost of educating children, and/or added income for retirement years since savings, social security and employment pensions are not sufficient for most people.

Because there are so many kinds of life insurance policies with different protections and benefits, terms and conditions, the subject can seem complicated and confusing to prospective insurance buyers. The purpose of this booklet is to give you, the consumer, a basic understanding of life insurance and to provide guidelines for planning your insurance program. With careful planning and the help of a qualified professional life insurance representative, you can have the insurance you need at a cost you can afford.

Life insurance is a legal contract between a buyer and an insurer. Under the terms of the contract, called the "insurance policy," the insurer promises to pay a stated sum of money to the beneficiary (the person named by the buyer) in the event of the buyer's death.

The buyer, in turn, agrees to pay a certain sum of money to the insurer in the form of periodic payments called "premiums" in order to have the protection of the insurance.

A life insurance company receives premium payments from thousands of policyholders. The company uses this money plus income from profit-making investments in stocks, bonds, real estate, business loans, etc., to (1) pay all operating costs each year, (2) meet all claims filed by policyholders, (3) build surplus funds to meet year-to-year emergency, and (4) reinvest.

Certain requirements are established by both state regulation agencies and the insurance industry to protect all parties. For example, premium amounts are based on the age of the insured. Younger buyers pay less for life insurance than older buyers and a physical examination may be required to prove that a buyer is in good health and is, therefore, a fair risk for the company over a long period of time.

All terms and conditions of an insurance policy are set forth in the contract and state exactly how much a buyer must pay and for how long in order to have a stated amount of life insurance protection. Other clauses in a policy state what a policyholder can do in the event a premium payment is late, to avoid having a policy cancelled. Restrictions as to insurance company investments and requirements for policyholder reserves provide a basic protection.

Life insurance can be a wise purchase for just about everyone, whether single or married. Generally, people buy life insurance for one or more of the following reasons:

  • To provide financial security for a spouse or children after death;
  • To provide money for the future education of children; or
  • To provide added income for retirement.

Insurance experts advise prospective buyers to consider their insurance needs in terms of a long-range insurance program that will include all present and future needs and possibilities during their lifetime.

Usually, all current and long range needs can be met by combining two or more types of insurance. Such a policy can cover the years when the buyer is beginning a work career and establishing a home and family. Thereafter, the policy can be adjusted to the years when work earnings are at their highest and when children require financial help for such things as college or career training. Future adjustments in the coverage also can provide for the buyer's retirement years when there are no earned salary wages and retirement income must meet every financial need.

Whether married or single, an individual also can benefit during working and retirement years from an insurance policy that provides a loan value, an income for a dependent parent, or a reserve against disability or loss of wages.

It is not possible to state an amount that could be right for every individual and family insurance buyer. Circumstances differ widely, such as ages of family members, reasons for obtaining the insurance, and family income and other resources. All families must figure out for themselves what percentage of their incomes they are willing to spend for insurance.

Bear in mind that in the event of the buyer's death, the proceeds from the insurance might well have to assist the family over a long period of time until children are no longer dependent and even into the retirement years of a surviving spouse.

Remember, personal circumstances can and often do change over the years and insurance can be purchased for considerably less money when a wage earner is young and in good health. Regardless of marital status, insurance can be a very sound beginning toward building long-range financial security.

For every insurance buyer, income at the time of application for a policy is a major, often deciding, factor in the type and amount of insurance they buy. For this reason, a professional insurance representative can provide valuable help by explaining how an insurance plan can be arranged to provide needed protection at the least cost and adjusted over the years as income increases.

Insurance plans are drawn on the basis of the buyer's total amount of insurance. Your insurance representative will need to know how much insurance the buyer, a husband or wife, already has from such sources as veteran's benefits, employer's insurance plans, unions, service and professional organizations, or other sources. If you have existing insurance coverage, you can save time by knowing the terms and conditions and the amount of each insurance policy before you talk to an insurance professional.

Usually, employer and other group policies are term insurance: they do not have a cash value and their protection stops if you leave the employer or the organization. Many policies do have conversion clauses so that you may "take over" the insurance if you leave by purchasing a new individual policy without health evidence at your attained age. Some organizations do have policies that extend over the years after you retire (rather than resign) from a company or an organization. However, your insurance professional will need to know full details in order to help you build the most effective long-range insurance plan.

As with any investment, large or small, it pays to do business with a reputable firm and to check around. Because there are many life insurance companies that offer proven, long-range service to their policyholders, there is also a good deal of competition. For this reason, and to the buyer's advantage, there are often important differences in policy terms and conditions as well as benefits. It is a good idea to review the policies offered by more than one company, and that means you will want to talk with more than one insurance representative.

Professional insurance representatives will counsel prospective buyers in planning an insurance program and in explaining the wide range of policies available to meet different individual requirements. Basically, every insurance program or individual policy is based upon two kinds of insurance: TERM and WHOLE LIFE. All other types of insurance offered are variations of these basic kinds. The following information describes a number of the policies available.

This type of insurance provides protection over a set number of years -- usually five or ten year periods. At the end of this "term" the protection ends. Usually there is no cash value for the premiums paid over the years. That is, no money is returned to the buyer.

Premiums for a renewed term are higher than the original payments. However, term insurance usually is the least expensive kind and many term policies can be converted to whole life policies at any time during the term of the insurance.

Term insurance can be the most economical way for a wage earner with limited income to provide adequate protection for a family, or for a single person to provide for their own death costs and payment of any debts outstanding at the time of death.

  • RENEWABLE TERM insurance can be renewed at the end of the term, at the option of the policyholder and without evidence of insurability, for a limited number of successive terms.

For example, a 30-year-old non-smoker buying $50,000 worth of one-year renewable term insurance may pay a premium of $145 the first year, if a man, and $138, if a woman. Women pay less for life insurance because on average they live several years longer than men. Here is how the premium in a typical policy would increase:

AGE 40 $190 $178
AGE 50 $405 $328
AGE 60 $925 $715


CONVERTIBLE TERM insurance can be exchanged, at the option of the policyholder and without evidence of insurability, for another plan of insurance. 

Whole life (often referred to as straight life, permanent life or ordinary life) insurance provides protection for the lifetime of the buyer and at the buyer's death the amount of the policy will be paid to a beneficiary (the person named by the policy buyer).

Whole life policies usually offer other options which allow the buyer to cancel the policy, receive either a cash payment or an income for life or for a stated, limited time, or convert to reduce paid-up or extended term insurance. The flexibility and the fact that premium costs are the lowest for whole life policies make these policies among the most popular.

Payment of the premiums can be set up in a variety of ways:

  • Annual premiums for as long as the buyer lives;
  • Annual premiums for a set number of years or to a certain age; or
  • One single payment for the full cost of the policy at the time of purchase.

The payments remain fixed and cannot be raised. In addition, these policies build cash value after a certain number of years which the buyer may use for different purposes during the years of the premium payments.

"CASH VALUE," an important feature of whole life insurance, is a sum that increases over the years on a tax deferred basis. For example, suppose a 30-year-old non-smoker wants to buy $50,000 worth of coverage. The annual premium for a man might be $765 for a whole life policy with no dividends, while a woman might pay a $735 premium. This is how the cash value typically would grow for both men and women:

AGE 35 $1,700 
AGE 40  $5,050
AGE 45  $8,860
AGE 50  $13,100


There are several uses for cash value:

  • Using your policy as collateral, you can borrow from the company up to the amount of the current cash value. However, if the policy holder dies and the loan has not been repaid, the amount owed plus interest will be deducted from the death proceeds paid to the beneficiary.
  • With your consent, the insurance company can draw from the cash value to keep the policy in force in the event that you miss paying a premium.
  • If you no longer wish to pay premiums, the accrued cash value can be used to fund a paid-up policy that can be continued as term insurance for a specific period of time.
  • The cash value can be used to purchase an annuity that provides a guaranteed monthly income for life.
  • You can terminate the policy and the insurance company will pay you the cash value in a lump sum.


Whole life insurance may be purchased in a variety of ways, as reported below.

  • MODIFIED LIFE -- Provides protection for individuals who want whole life insurance but wish to pay lower premiums in their younger years. The premium is relatively low in the first several years but increases in the later years.
  • LIMITED-PAYMENT WHOLE LIFE -- Provides protection for the life of the insured, but premiums are payable over a shorter time period. Consequently, premium rates are higher than for traditional whole life insurance.
  • SINGLE-PREMIUM WHOLE LIFE -- Provides for the duration of the insured's life, in exchange for the payment of the total premium in one lump sum at the time the policy is issued.
  • COMBINATION PLANS -- Combine term and whole life insurance in one contract. Frequently, premiums for combination plans do not increase as the insured grows older. 

A relatively new form of insurance providing permanent protection, universal life allows policyholders more flexibility than whole life insurance. You can pay premiums at any time and in any amount after the initial payment, provided enough cash value has accumulated. Also, you can reduce or increase the amount of death protection in the same policy without buying a new one.

With a universal life insurance policy, the amount of the cash value reflects the interest earned at prevailing interest rates. Thus, the amount you accumulate varies according to the general financing climate. Usually, rates are guaranteed for one year. After that, a new rate is determined. The rates used can be no lower than a guaranteed rate specified in the policy - typically four or four-and-one-half percent.

A variation of universal life, this form of insurance has fixed premiums and fixed death benefits. As in other universal life policies, its cash value growth depends on market conditions. If market conditions are favorable and if the premiums paid in the first several years that the policy is in force are large enough, premiums for one or more years may be reduced or discontinued.


With this type of permanent protection insurance, you can invest your premium in a separate fund which can be either an equity, money market or long-term bond fund. The cash value and death benefit vary in relation to the performance of your investment fund. However, the death benefit cannot fall below the amount of insurance originally purchased.

There are two types of variable life policies -- SCHEDULED PREMIUM VARIABLE LIFE insurance and FLEXIBLE PREMIUM VARIABLE LIFE insurance. Under a scheduled premium policy, payments are fixed as to the timing and amount. Policyholders who own a flexible premium policy, on the other hand, may change the timing or amount, or both, of their premium payments.

Life insurance agents who sell variable life must be registered representatives of a broker-dealer licensed by the National Association of Securities Dealers and registered with the Securities and Exchange Commission. If you are interested in this type of policy, be sure your representatives give you a prospectus outlining and explaining all disclosures about the variable life policy.


Another form of permanent protection, adjustable life lets the policyholder raise or lower the face amount of the policy, increase or decrease the premium, and lengthen or shorten the protection period.

You may consider special purpose insurance, such as home mortgage and/or credit life insurance. For example, a head of a family may purchase an additional amount of term life insurance to pay off a mortgage balance in the event of death. For the same reason, credit life insurance can provide separate insurance funds to pay off a loan balance on an automobile, a mobile home, a boat or other expensive property. These term policies serve to protect the long range insurance program that will be used throughout the buyer's lifetime or that of his/her beneficiaries. However, remember that such insurance may be costly, and unnecessary, if you already have sufficient whole life or term coverage.


From time to time you may encounter an offer to buy life insurance through the mail at an attractively low price and, often, without a physical examination and regardless of age. But be careful! Never purchase such a policy until you have read and understood every word of the policy, not just the advertising. Check with the New York State Department of Insurance to find out if the company is licensed to sell insurance in your state. If an unlicensed company should refuse to pay a claim on your policy to which you feel you are entitled, you may have no recourse to the insurance department of your state if it does not have supervision over that company.

The best way to spend your money depends on what your needs are and the extent of your resources. Every family should set funds aside for all three -- insurance, savings, and investments.

In considering life insurance, some people may argue that it is better to buy the least amount necessary to protect dependents and to put one's money over the years in such things as stocks and other investments. The usual reason given for this is that the cash value of life insurance does not automatically rise to keep pace with inflation, and for a buyer to increase insurance protection at a later date means higher premiums. On the other hand, the risks involved due to market fluctuations, when investing in stocks, must also be considered.

Be sure to consider how much you want to put into insurance and how much you want to put in other areas of investment, such as stocks, mutual funds or real estate that might hedge against inflation.

A low-cost term insurance policy may be the best bet for some; it has no cash value build-up, but offers protection for your family in case of death. Because term insurance costs are much less than whole life, you will have more money on hand, money which can be invested in more extensive term coverage or in apparently safe and sure assets which will appreciate over the next 20 or 30 years.

Keep in mind, however, that if you follow this "buy term and invest (or save) the difference" path, you must exercise a degree of self-discipline and acquire the expertise to systematically and prudently invest or save. Otherwise, your protection/savings program might not produce the results you have anticipated.

Just as important as figuring out how much you can afford to pay in premiums for life insurance is determining the cost of the policy. That is, how much insurance are you getting for your premium dollar? The cost of life insurance can vary greatly among companies, depending on the type of insurance you buy.

Many states require cost disclosures statements and most companies provide them even if the state does not require them. Clearly, comparison shopping for the best value, that is, the most insurance coverage for your premium dollar, is a wise course to follow.

When comparing the cost of life insurance, you may want to use a special cost index developed to aid in shopping for life insurance. The cost index provides you with a number that reflects the price of the policy. A policy with a smaller index number is generally a better buy than a comparable policy with a higher index number.

The following rules are important to remember when comparing costs:

  • Cost comparisons can only be made between similar life insurance plans.
  • Index number comparisons should only be made for your age, the type of policy you intend to buy and the amount of insurance you plan to purchase.
  • Small variations in index numbers might be offset by other policy features or differences in the quality of service you get from an insurance company. Your Life Insurance Company or representative can give you additional information about using a cost index to compare costs.

Basically, there are two types of insurance companies: the stock company and the mutual company. The stock company is owned by stockholders who elect a board to direct the company's management. A mutual company has no stockholders and is directed by a board elected by the policyholders.

While both the stock company and a mutual company may issue participating and nonparticipating policies, the general practice is that the privately owned stock company issues nonparticipating policies (no dividend), while the mutual company issues participating policies (dividend-paying).

In all states, life insurance representatives must be licensed to sell policies to consumers. Qualification is based upon a written examination, and often representatives will have had further training in various insurance areas such as financial planning.

An insurance representative may receive extensive training through the company he or she represents or The National Association of Life Underwriters. Additionally, the agent may have received a certificate as a Chartered Life Underwriter (CLU) from the American College of Life Underwriters after completing a college level course of study.

You, as the policy buyer, must be assured that the agent you select has the knowledge and experience to advise you. Equally important, you must be assured that the agent will provide the time and service to advise and assist you in the future.

Qualified, reputable insurance representatives are professionals in their field, and you should choose one as you would a doctor or lawyer. Talk with more than one representative and be sure you have confidence in the person you eventually select. Planning and adjusting an insurance program in later years requires guidance by a competent insurance representative.

Attractive offers may come your way that offer to replace your existing life insurance policy with one from another company. Often, if you have a whole life policy, its cash value may cover more than the initial premium for the replacement policy. The new policy may have some advantages over your existing one; it may replace your whole life policy with a term policy having a greater death benefit coupled with an income producing policy. Whether or not it is advisable to replace or turn in your existing policy depends on a number of factors that you must determine yourself, according to your own situation.

Whatever you do, do not be rushed into signing up with the new company before you thoroughly compare the advantages and disadvantages of changing policies. Check with your present insurer and even other companies to compare costs and benefits that you might obtain or already have. Among things to consider when thinking of replacing your insurance are: the cash value of your present policy, premium size, loan value, insurance cost and limits on denial of coverage. Never cancel a policy until there is a new one in force.


  •  Always read your insurance contract carefully and, if necessary, ask your agent for a point-by-point explanation of the language.
  • Remember that your insurance contract is a legal document. Therefore, you should familiarize yourself with the promises bound by that contract.
  • You can contact your state insurance commissioner's office if you have questions about an insurance company or its policies.
  • After purchasing new life insurance, you have a 10-day "free look" which entitles you to change your mind. If you do so, the company will return your premium without a penalty.
  •  It is wise to give photocopies of your policy to your beneficiaries and your lawyer.
  • Keep your policy, the name of the company and policy number in a secure place, such as a safety deposit box.


American Council of Life Insurance
1001 Pennsylvania Avenue. N.W.,
Washington, D.C. 20004-2599
Phone: 202-624-2000

Consumer Federation of America’s Insurance Group
414 A Street, S.E.
Washington, D.C. 20003
Phone: 202-547-6426
National Insurance Consumer Help Line
Phone: 800-942-4242

New York Department of Insurance
25 Beaver Street
New York, NY 10004-2319
(212) 480-6400
(800) 342-3736