Life insurance seems complicated -- what are the basics?

Life insurance is often made to look complicated but it really is very simple.

Term Life Insurance is pure "death insurance" -- the policy owner pays a premium to the insurance company (often annually or quarterly). If the insured -- the person whose life the insurance company insured -- dies while the policy is in force (within the period for which payment was made), the insurance company pays the "face amount" of the life insurance to the beneficiary. As the risk of death increases as people get older, the premium also increases with age, sometimes each year, or every 5 to 10 years. At the older ages, term insurance costs become VERY expensive, because the chances of an 85 year old dying within the next year become very high.

Cash Value Life involves a combination of both Term Life Insurance with sort of a savings or investment account built in. The savings element creates a fund that can be used to pay the higher term insurance costs that go with older age. This is supposed to enable the premiums on cash value policies to be kept level during the insured's lifetime. Among the range of Cash Value Life policies are:

Traditional Whole Life and Universal Life products, in which the cash not needed to pay term costs (and the insurer's expenses -- including the sales person's commissions) are invested by the insurance company in fixed dollar type investments, and

Variable Life and Variable Universal Life, in which the "extra" cash is invested in securities mutual fund type accounts selected by the owner from among the insurer's available choices. Variable products thus have elements of life insurance and securities and are regulated as securities under the Federal Securities Laws and must be sold with a prospectus.

In the insurance industry there are two other basic categories that sometimes become important: Individual Life and Group Life.