Recently I had occasion to call upon the friend of one of my life insurance clients. The gentleman and his wife greeted me with a cup of coffee and stack of papers—their life insurance policies from another company. The deck page of each said “Whole Life Insurance.” Recently, however—and for the second time—the couple had been notified of a very steep increase in their premiums.

“I always thought whole life was never supposed to change. That’s why I bought it,” the man complained. The policy had been mailed to him, and, as I suspected, no one had ever explained the terms of the policy to him after he had received it. He saw the words “whole life,” remembered that the agent had said it would last him to age 100, and had never asked about the fine print tables contained within. Since the tables showed the increase of the cost of insurance per $1000 of coverage, and then required the addition of annual fees, followed by a multiplication factor to get his monthly rate, he had no idea how to use that table anyway.

The first increase was mild. He overlooked it since the company had been bought up by another company. He assumed the new company had just raised all the rates. Ten years later—and shortly before my visit—he faced a much larger increase. In fact the increase was so large, and would continue to increase in five year increments after the age of 70, that taking a new policy at age 65 actually saved him a considerable amount of money.

The gentleman did not realize that he had a “modified” whole life policy.

Life insurance comes in many shapes and sizes, but the three basic types are Term, Whole Life, and Universal. Term is what most people purchase when they do it through the internet, over the phone, or by mail. It isn’t that they really want a Term policy—which will last ten or twenty years and then increase exponentially if they try to renew it—it’s that Term looks dirt cheap and can be obtained with a very high face value. Most people never do the math. If they did, they would quickly see that Term is ultimately the most expensive policy to buy. It may be cheap in the beginning, but the renewal premiums, or even switching to a whole life in 20 years will mean spending more money over time than if you had owned a whole life or universal in the first place. Worse yet, you will be spending the largest chunk of money when you can least afford to do so—in your senior years when you are trying to live on social security or a pension that is supposed to last you for nearly a third of your life. Term is, however, easy to understand in the short run. You have a set premium and a set face value or benefit for a set period of time. After that, everything can change.

Whole life is often—and erroneously—explained as “the most expensive” life insurance. If taken in your senior years, it will be the most expensive. However, if purchased in your 20s, it may be nearly the same as a Universal. In fact, with some companies, it may even be less than a Universal. Whole life is, however, easy to understand. If you have “guaranteed” whole life with level premium and level benefit, you will pay the same premium until you reach the maturation date of the policy (your age 100 or 120, depending on the company). At that point, if you are still living, you will receive a check for the face value of the policy. Your premium can change if you have riders, such as children’s term riders or disability riders which usually drop off at some point, thereby reducing your premium. Of course, unlike term insurance, whole life develops cash value, thus increasing your assets.

Universal life is often the hardest to understand and is frequently misrepresented by agents, but is in reality the best bargain. Universal is flexible in that you can change any part of it at will. Of course, if you want to increase the face value, you will have to prove insurability. But you can increase or decrease your premium, can take money out of the savings portion, can borrow against it, and can even skip a payment in an emergency without losing it. You can also fund it in such a way that it will function as a “paid up” once you have paid into it for 15 or 20 years. Universal Life Insurance has two components, a savings part and a life insurance part. The cost of insurance is paid out of the savings and interest, not directly out of your premium. The savings is yours. You can take some of it if you need it, so long as you always leave enough in there to pay the cost of insurance. The secret to a successful universal is to fund it properly in the beginning, and that’s where people make their mistake. You can actually start a universal for very little more than a Term, but then it will act like a Term policy. You want to fund it with enough premium to build the savings in such a way that when the cost of insurance goes up for your age, you will have enough money in the policy to carry it. Ideally, your “pot of money,” the savings portion, should never start decreasing. A well funded universal can start with a face value of only $25,000 but end with a cash value (and thus increasing face value) of well over $100,000.

Each of the three basic types—Term, Whole, and Universal—can be “modified.” The word “modified” means something different to each company, but can change the way the premium behaves and can even change the nature of the benefit. If you purchase a modified “anything,” beware. If the company can’t explain it to your satisfaction, don’t buy it. The best approach is to work with a human agent—face to face. If the company doesn’t offer all three types, or if the agent doesn’t understand all three, go somewhere else. It’s your family’s future you are putting on the table.

Karen Ruff, D.A. is a freelance writer and insurance agent for a 128 year old nationwide company. Licensed in South Carolina, she specializes in life insurance, is certified in long term care and also provides cancer insurance and alternatives for protecting senior savings and investments

Dr. Ruff is the owner of a quarterly newsletter “Senior Sword” which is available in print or as a PDF email attachment. For additional information, email silverscribler@aol.com