“You get what you pay for” is a well worn adage that is as applicable to insurance as it is to a used car purchase. In our discussion we will see that the fundamental purpose of insurance is protection. The insurance product that best satisfies that need when you are starting out in life is term insurance. Why? Because when an individual is young, the premium dollars spent on term insurance will provide the most protection for the least cost. However, as an individual gets older the cost of term insurance can rise dramatically. Also, lower cost term coverage is usually unattainable during the later stages of life as health problems begin to occur. Consequently, most insurance advisors recommend clients move toward a combination of term and permanent insurance — whole life or universal life — at a point in their lives when they can afford the higher premiums associated with permanent insurance products. By purchasing permanent insurance, the individual is able to lock in a specific payment for the remainder of his or her life and guard against being uninsurable at some subsequent point.


The insurance industry, like most providers of consumer goods and services, offers an array of products, each designed to satisfy a particular requirement in the market place. In fact, the variety of products coupled with the unique jargon associated with the insurance industry can make the task of simply understanding available insurance options a bit daunting. We will try to keep our discussion simple and straightforward.

The three most popular types of insurance sold in the United States today are term, whole life and universal life. We will focus on these first and then examine some of the other types of life insurance including variable, group and multiple life policies.


Term life insurance offers protection for a stipulated period or term. The policy may be renewable annually, or it may be issued for a fixed period, perhaps 5, 10 or 20 years. The face amount of the policy is payable only if death occurs within the period that the insurance is in force. Most term policies are sold with a renewability clause which allows the policyholder to successively extend the insurance coverage up to a specified termination point which is usually 65 or 70 years of age. Also, many term policies have a convertibility feature that allows the holder to exchange the term policy for another type of life insurance program.

Term policies issued for a fixed period of time may not have conversion options available at the end of that time. If they do have conversion options, it will be at an increased cost.

Term policies may be either decreasing or level term. These are concepts that refer to the face amount of insurance coverage. Decreasing term policies provide a reduced amount of coverage for the same premium cost at each renewal period.

With level term policies, the amount of insurance coverage remains the same over a period of time, however the cost of the insurance increases as you get older. Some policies have renewal periods in which the premiums change at each specified period. The premiums start very low at age 25 or 30 and increase at five year intervals for the life of the policy. A more popular version of level term insurance is one in which the amount of coverage and the premiums are fixed over a period of 10, 15, 20 or 30 years. This type of insurance is referred to as “fixed level term” and enables the individual to buy term insurance to fulfill their needs over an extended period. These programs usually are available in three rate classes: preferred, standard and smoker. Preferred rates are the lowest and offered to those with the more healthy lifestyles while smoker rates are the highest for all age categories.

So what is the bottom line on term insurance? Generally, for a younger person term insurance is the least expensive form of insurance coverage. It is designed to furnish basic protection against the risk of death and is comparatively inexpensive when purchased at a point in life when the probability of death is low. Term policies do not include additional characteristics such as the accrual of cash value. While cash value is a useful feature contained in many types of policies, it has the downside of increasing the premium charge. Consequently, for younger individuals, junior enlisted and junior officers who are living on a tight budget, it is often recommended that they begin their insurance program with a term policy.


Unlike term insurance, which is intended to provide protection for a specified period of time, the purpose of whole life insurance is to provide protection for the duration of an individual’s life. It is called permanent insurance because the amount of insurance coverage and the premium charged generally remains constant over the life of the insured. In addition to providing death protection, whole life policies contain a savings feature called cash value. The idea behind cash value is to provide the insured with some type of tangible benefit while they are alive in return for the insurance premium charges they are paying. The benefit is in the form of a savings program which generally carries a guaranteed minimum level of interest return. Consequently, the cash value of a policy will build up over time. Since the actual cost of insurance increases with age, the build-up of cash value is also used to fund these increased charges later in the life of the insured.

The difference between the cash value of the policy and face amount of coverage is the actual amount of insurance protection provided by the policy.

Based upon the duration of the premium payments, there are three types of whole life insurance — ordinary, limited payment, and single payment. Under ordinary life (also called straight life) policies, level premium payments are made on a periodic basis over the life of the insured. The earlier in life the policy is started, the lower the periodic payments will be. However, all things being equal, the earlier you start the coverage the greater will be the total payments that you make into the policy. Of the various types of whole life policies available, ordinary life offers the most death protection and the least savings build-up. Consequently, most insurance advisors agree that when death protection is the principal objective, the ordinary life policy represents the best choice for families who are filling their permanent insurance needs.


Universal life is similar to whole life in that it provides both death protection and a cash value savings feature. With whole life policies these features are merged and the allocation of premiums between these benefits is not distinguishable to the policyholder. In universal life policies, the cost of death protection and the investment in the cash savings feature are separated.

Universal life is available with either a level death benefit or an increasing death benefit. With a level death benefit you have a fixed amount of protection, i.e. $100,000, which is the face amount of the policy. The increasing death benefit combines the face amount of the policy and the cash value for a total death benefit.

The cost of insurance protection provided by universal life policies is similar to term insurance — that is, the cost will increase as the policyholder gets older. The cash savings component earns tax-deferred interest at market rates and generally includes a guaranteed return of about 4%. If all the cash value remains in the policy until the death benefit is paid, the interest earned is not taxed since the death proceeds of a life insurance policy are not considered taxable income of the beneficiary.