Every Life Insurance policy has two core parts to its price: the mortality cost—determined by your odds of dying at that moment—and the policy expense cost—your share of Insurance company expenses (rent, staff, and Agent commissions). The mortality charge increases every year as you age and your risk of dying increases. The expense charge stays relatively constant.

Most permanent Life Insurance policies have level premiums for life. How is that possible if the mortality charge increases every year? The Insurance company averages the increasing mortality charges over your remaining expected life. In short, you overpay in the early years so that you can underpay in the later years.

Term Insurance costs, on the other hand, increase regularly as you age. Sometimes the increase is annual, and sometimes it's every five or ten years or more. Term Insurance costs can be averaged over 10, 15 or 20 years, so the price is level for the entire Term. Term Insurance, however, does not have a cash value element. If you drop a Term Insurance policy in its early years, you receive no refund of any overpayment.

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From Insurance for Dummies © 2001 by Wiley Publishing, Inc. © 2000 Text and Author Created Materials Copyright Jack Hungelmann. Used by arrangement with John Wiley & Sons, Inc.

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