Buying life insurance: choosing the right policy can protect and preserve your assets for your kids without costing their inheritance - excerpted from 'Talking Dollars and Making Sense: A Wealth Building GuIde for African-Americans'

Black Enterprise, Oct, 1997 by Brooke Stephens

WHAT IS TERM INSURANCE?

If you took out $750,000 worth of life insurance, it could cost you as much as 58,920 a year for a whole-life policy or $400 a year if you bought a term policy. Both policies will pay your beneficiary $750,000 if you die. Term insurance costs much less than whole life because there is no cash value to it. If it expires and you don't renew it, you cannot cash it in and get money back. That's the biggest difference (See Comparisons of Life Insurance table).

As you get older, the cost of term will increase every year unless you buy a kind of policy called a "level-premium" policy. When you purchase term life insurance without level-premium payments, you must renew the policy each year. When purchasing term life with level-premium payments, you make a commitment to the insurance company to keep the policy for a specified number of years, which allows the premiums to be averaged out over that period of time. This means that you will pay the same premium at age 45 as you did at age 25, even though you have become a greater risk.

Realize that opting for the level-payment premiums will cost you more annually in the early years to keep the premium unchanged as you age. The anticipated cost of a $100,000 policy for a 35-year-old male nonsmoker would look like this:

                 Term Life    Whole Life    Universal Life

Annual
premium            $146         $862             $664

Cash value
after 5 years      None         $5,550           $7,498(*)

Another favorite sales pitch used with young applicants is: "Purchase a low-cost 10-year-payment vanishing premium policy. You can always borrow out the cash value later if you need it for retirement or college tuition." What they don't tell you is that this method usually doesn't buy enough coverage. The fine print in a vanishing premium policy also carries a warning that if future dividends are not enough to cover the true cost of the insurance, additional payments may be required.

If you must buy a cash-value policy, universal life is cheaper than whole life and builds cash values sooner. Comparing premiums is not the best way to judge the true cost of a policy The interest-adjusted index gives you a more accurate cost per $1,000. Ask your agent to give you the formula and explain the indexed-adjusted net costs. Most of what you pay in during the first year goes to cover the commissions for the agent, setup fees for the insurance company, administrative expenses and mortality charges. People also forget that the proposed illustration is just a projection of future earnings based on an interest rate that may or may not be realistic over the next 10 years. Nothing is guaranteed about those future dividends.

A good compromise suggested by some industry experts is to buy two policies. One should be a low-cost universal life policy for $50,000 or $100,000 that will last for a lifetime. The second should be a term insurance policy for $500,000 or $600,000 that will expire in 15-20 years. The major concern is to get the coverage you need at a rate you can afford. Compare and shop for the best rates.