Making Life Complicated.

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Author: Baldwin, William

WHY SELL A SIMPLE COMMODITY WHEN, WITH THE ADMIXTURE of just the right variations and subclauses, you can make the customer really dizzy? This, in a nutshell, is the philosophy of the life insurance industry.

The simple product is pure death protection, a.k.a. term insurance. In the easiest-to-understand version, you pay a flat annual premium for many years for, say, $1 million of coverage. If you die when the policy is in force, your loved ones get the $1 million; if you don't, they don't.

So simple. Such a bargain ($1,090 a year over 30 years for a healthy young man). So easy to compare prices. To which the life insurance salesman says, God forbid.

The latest variation, described on page 72 by Carrie Coolidge, is called return-of-premium term insurance. It costs more. But if you keep up the payments and survive the policy, you get your premiums returned (without interest). In effect, the incremental premium has given you a savings account on the side, one with lotterylike features and an uncertain return.

There are variations on the variation. If you drop the policy partway through, you get a certain percentage of your premiums back. The percentage varies from year to year and from policy to policy. Now, to compare prices, you need the help of an actuary and a computer borrowed from the National Security Administration.

This is what happens when you combine death protection with investing. Ask yourself: Do you really need your life insurance premiums back, as opposed to some other pot of money at retirement? Is it really helpful to have your savings account wrapped into a product whose main purpose is to protect your dependents from starvation?

Glenn S. Daily is a consultant who helps wealthy people evaluate life insurance. Writing 18 years ago in this magazine, he outlined all the things you have to think about in evaluating any product with an investment flavor, which is to say any that has a cash surrender value. At the conclusion he threw up his hands: "As a last resort, buy term insurance and wait for the fog to lift."

I checked in with him the other day. Predictably, he's wary of return-of-premium policies and the specious appeal of getting a 100% refund. "The fog hasn't lifted," he says. "It has gotten worse."

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By William Baldwin, Editor