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Money Savvy Weekend

Demystifying the Insurance Policy

October 22, 1999|KATHY M. KRISTOF

There are two types of life insurance: term insurance, which covers you for just a set period, and so-called permanent insurance, which is designed to be part-insurance, part-investment.

When you're young, term insurance is cheap because your chance of dying is slim. But as you age, it can become expensive.

Consequently, if you believe your need for insurance will never diminish, you may be better off with permanent insurance, which comes under many names, including whole life, universal life and variable universal life, to name a few.

Although the details of the various types of permanent insurance policies differ, all of them are made up of two parts. One part is a basic term insurance policy. It simply promises to pay a set death benefit if you die that year. The other part is an investment account.

The idea is this: With whole life, you pay extra in the early years to build up an investment account within the policy. If you die while the policy is in force, the policy's death benefit will be paid partly from insurance, partly from the investment dollars you've built up in your policy.

As the value of the investment portion rises, your need for insurance drops. So, the policy buys comparatively less insurance. That's supposed to keep your cost of insurance lower in later years.

However, the only way this works effectively is if the invested portion of your account actually does rise significantly as you age.

Need to know more?

You can find a complete tutorial on how life insurance works, and what types of insurance are offered, at the Los Angeles Times Web site at http://www.latimes.com/insure101.

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