( Commentary
It's insurance time again
Bv MIKE DOTTEN.
PHIL NYEGAARD and
BRUCE REICHERT
The authors work with the Consumer
Research Center at the University
Once again it appears that U of O
students are being barraged by life in
surance literature, the latest sent to the
student’s parents recently. And as is
usually the case, students are being sold
life policies which, in the main, are
inappropriate to their needs.
There are two types of individual life
insurance policies: term insurance and
term insurance with a “savings element.”
Consumer Reports recommends term
insurance. So do we.
Life insurance rests on a quite un
derstandable premise: a statistical record
of the death rate in America. It’s
inescapable that the older one gets, the
more likely (me is to die. This means that
an individual must pay more for insuring
his life at age 50 than at age 20.
Insurance companies, many years ago,
realized that few people would be willing to
pay premiums which increased annually
as one grew older. So, they hid the fact by
devising a plan of insurance under which
premiums did not increase from year, to
year, but, rather, remained constant
throughout the premium-paying period. Of
course this meant it was necessary to
overcharge a person in the earlier years to
compensate for the high cost of insuring
him in the later years. This overcharge is
the source of the “savings account”, or
"cash value” part of some policies. This
plan complicated the buying of life in
surance almost beyond the realm of or
dinary human understanding. It also
relegated to the status of a sideline what
was once the life insurance industry’s
primary function: to provide un
derstandable, adequate, reasonably
priced protection against the con
sequences of an untimely death.
Insurance companies like to impress
prospective buyers with their vast arsenal
of policies covering every conceivable
need. Real innovation in life policies,
however, is rare. All policies are either
term or term in conjunction with a savings
element, or some combination of these
two.
TERM INSURANCE
Term insurance provides protection for
a specific period of time. That period may
be as short as one year or it may run to age
65 or 70. Customary terms are 5, 10, 15, or
20 years. It usually cannot be purchased
after age 70. Term insurance resembles
fire or auto insurance in that it is pure
protection without any cash value buildup.
This means that it is considerably less
expensive for a college student to pur
chase, allowing him to procure 3 to 5 times
more insurance protection for the dollar.
WHOLE LIFE INSURANCE
Whole life insurance is the most com
monly sold policy with a savings feature.
(It is sometimes referred to as ‘per
manent’ or ‘ordinary’ insurance.) Whole
life policies provide, along with decreasing
insurance protection, and increasing cash
value, or “savings account,” which pays
out the face amount of the policy at age
100. In other words, should a man with a
$10,000 whole life policy live to age 100, he
would receive from the insurance com
pany the $10,000; and if he should die
before age 100, his beneficiaries would
receive the $10,000. Whole life insurance,
then is an attempt to combine both in
vestment and insurance protection in one
policy. By giving life insurance this dual
nature, we contend that neither protection
nor investment is adequately provided.
Another type of cash value policy is
called endowment insurance. This type of
policy resembles whole life insurance
except that the cash value builds up faster
and pays out the face amount of the policy
to the policyholder at age 60-65 instead of
age 100. This type of insurance has a very
high rate of premium and is beyond the
ability of most students to pay.
RATIONALE
Whole life insurance has always been the
favored child of the life insurance in
dustry, and with good reason. Since the
money taken in by the company and by the
agent operating on commission is several
times greater with whole life than with
term insurance, there exists greater in
centive to push this type of policy.
Adherents of whole life insurance view it
as a form of “forced” saving. They feel
few individuals will save regularly unless
forced to do so, and that the fear of losing
an insurance policy will spur them to save.
Proponents also stress the fact that once a
man buys a whole life policy, he is
guaranteed lifetime protection regardless
of any incurable diseases he may contract.
Upon closer examination, however, we
feel these reasons are somewhat
inadequate and misleading. Take the
argument of “forced saving.” There are at
least three things to realize.
First, a whole life policy is, by definition,
a combination of decreasing insurance
protection with an increasing cash value
accumulation, with the face amount of the
policy always equal to the sum of the cash
value and the protection element. So, as
your cash value increases, your actual
protection provided by the company
decreases. The effect of this is to gradually
transfer—at the precise same rate the
cash value increases—the risk of insuring
the policyholder from the company’s
shoulders to the policyholder himself. In
other words, if a man were to die owning a
$10,000 whole life policy which had ac
cumulated a $5000 cash value, his
beneficiaries would not receive $15,000.
That $5,000 of “forced savings” would
have “died” with him, helping to make up
the face amount of the policy, and leaving
the beneficiaries with only $10,000.
Secondly, this “forced savings account”
in whole life policies is a poor investment
when compared to the interest to be
earned in other savings and investment
institutions. Our preliminary in
vestigations indicate that in the vast
majority of cases, a man would benefit
more by buying the cheaper term in
surance and investing the extra money
saved on premiums. A typical $10,000 non
participating (no “dividends”) whole life
policy issued at age 25 produced the
following results when compared with a
term policy over a 40 year period: $1792
more could be earned by buying the
cheaper term insurance and investing the
difference in premiums at an interest rate
of 4 per cent; $3935 more could be earned
at 5 per cent interest; and $7482 more could
be earned at 6 per cent.
Thirdly, there are now many institutions
in operation which will help a man save a
portion of his monthly or weekly pay check
so that he does not have to rely on the in
surance industry to do it for him.
The other major argument profferred in
favor of whole life insurance is that it
guarantees life-time protection regardless
of what happens to the policyholder. This
may have been a significant advantage at
one time, but it is now possible to procure
term insurance with a ‘renewal privilege.’
This guarantees the policyholder the right
to renew the policy, without proving ones
insurability, at the end of the original
policy term.
The buying of life insurance is decidedly
a personal matter. Our personal view is
that most college students would be wiser
spending their hard-earned cash putting
food on the table. Yet those students with a
family interested in life insurance should
seriously consider the advantages of term
insurance. In the event of the untimely
death of a young father, term insurance
could provide 3 to 5 times more protection
for the money. And isn’t that what you
want?
Dii you hear that, they’re try in' to
stop the concerts here? Them pu$
afe always tryirV to rum oor fon...
\r
cAS
tobich pigsi