Life insurance is the mirror image of pension annuities and is the subject and focus of this chapter. The word “life” insurance is a misnomer, since this type of insurance pays off only upon death. But then “death insurance” is a much tougher sell even for marketing specialists.
The term of the insurance policy is the amount of time during which the coverage is in effect. For example, if you purchase a 10-year term insurance policy then you will pay premiums (each month) for 10 years, and if you die anytime during the 10 years your beneficiary will receive $100,000. If you die one instant after the ten years are over, they get nothing. The only insurance that truly covers you for life is “term-to-100,” which covers you to age100. Although this type of insurance is not available in the United States, the “no-lapse universal life” policy can serve as an alternative.
For any given term, a male of any age must pay a higher monthly premium than a female for the same coverage. Of course, the differences in mortality account for this observation. Next, both males and females (of any age) pay more for 30 years of coverage than they would pay for 20- or 10-year term life insurance. However, what may appear counterintuitive is that a 5-year policy is actually more expensive than a 10-year and sometimes even a 20-year policy. This irregularity is likely due to a combination of several factors. First, the lack of insurer competition may be resulting in higher premiums for 5-year policies, since consumers tend to be more interested in longer-term insurance. Second, the insurer may be trying to amortize all of the costs associated with offering this policy over a shorter period of time.