Three Kinds of Life Policies

INSURANCE companies have a talent for thinking up new "products" to sell, but their most popular policies continue to be whole life, term and the relatively new universal life. Which of those three is best for you?

In pondering that question, bear in mind that you need life insurance early in your career, when your children are young and your assets are low. But if you plan properly as you grow older, your insurance needs should decline or even disappear.

The insurance that protects your family when you need it most for the lowest possible price is term insurance. Premiums are modest when you are young, but advance along with your age. Rates go up every year in the most successful plan. That's annual, renewable and convertible term. If you want, you can convert it automatically into whole life insurance.

Whole life insurance premiums, by contrast, never rise. But whole life buyers start out paying several times as much as they would for term. At Equitable, $212 a year buys $100,000 worth of annual renewable term at age 40 for a man who does not smoke and $198 buys that amount for a woman who does not smoke. By contrast, $100,000 of whole life costs $1,620 a year for nonsmoking males and $1,369 for nonsmoking females at age 40.

The excess premium goes into a whole life cash reserve. When you retire, you can surrender your policy and retrieve a fair amount of the cash in your reserve. If you have kept the policy 25 or 30 years and used dividends to increase the face value, its cash value will be about two thirds the face value of the policy.

Whole life is a form of savings account. The tax deferred earnings grow, but the policyholder usually collects just a modest interest rate on his savings. And whole life has other disadvantages. There are heavy sales charges, typically 55% of the first year's premium, plus 5% annually for the next nine years.

You cannot withdraw any of your paid in cash and still remain insured. So if you need the money, you will have to borrow against it, typically at 8% to 10% interest or less if you bought the policy before 1980, You can't vary the premium or freely increase the insurance protection to suit your changing situation, either.

But you can do all that and more, with universal life insurance. This policy combines term insurance with a tax deferred savings account that pays a variable interest rate. So if you want to protect your family and build up tax deferred savings, one way to do it is to buy a universal life policy.

One important warning: Although universal life costs less than ordinary whole life, you have to shop for a policy with utmost care, because these policies too can carry large sale commissions, amounting to 50% or more of your first year's premium. Universal life does not always make sense for people who need less than $50,000 of insurance. It is often the case that the smaller the policy, the more burdensome the fees.