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I want to compare different types of Life Insurance in which a series of annual premiums are paid for a specific term. At the end of policy term, which may be longer than premium paying term, a certain amount is paid back to the proposer on survival. In case of death, a death benefit is given. Different insurance companies offer different terms which cannot be compared easily.

I would like to know what is the best way to compare such proposal.

An alternative that comes to my mind is computing PV of all payments and all receipts and finding the true cost of insurance. Is this the correct way or can a more scientific way of comparing such proposals be worked out ?

John Bensin
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Natwar Lath
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    You seem to be looking at whole-life insurance policies which are, in general, not as good a deal for the consumer, and a very good deal for the insurance company and its agent. The various proposals use different assumptions about future returns on the money you are investing with the company, and can be difficult to compare. You should look into renewable term life insurance policies. Their premiums represent the true cost of insurance far better than whole-life policies. – Dilip Sarwate Mar 20 '12 at 11:03
  • The different terms are because they are trying to estimate the returns. There is no way to know if their estimates better reflect reality. Note that you are doing two things: agreeing to pay x dollars a year for insurance; agreeing to pay Y dollars a year for investments. Are you ready to commit for years to this investment strategy.? – mhoran_psprep Mar 20 '12 at 11:14
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    Buying whole life insurance is essentially a bet. The insurance company is betting that you will live long enough to pay all the premiums and ultimately collect the agreed-upon proceeds when the policy is fully paid up. The total amount paid in plus earnings credited to your account will equal the face value. Additional actual earnings on the money you gave the insurance company will be the profit earned by the insurance company. You are betting that you will die before the policy is paid up and thus get more back than you put in. The only way you can win the bet is by dying. – Dilip Sarwate Mar 20 '12 at 12:33
  • @DilipSarwate EVERY insurance product is a bet. In your estimation is the only way to win a homeowner's insurance bet to have your home destroyed? There is almost no difference between speculation and insurance.

    You seem to have (to me) an unreasonably negative opinion of whole life. For sure it is more complicated and thus more prone to abuse than term life, but in reality they are two separate products with different target markets. I have previously owned term life products and now own a whole life. I have been very happy with each one.

     – Pablitorun Mar 20 '12 at 14:30
  • Well, most of such policy are sold in India and the insured persons are not always concerned about the insurance. They want a good return on the premium paid. They also want to keep the agents happy for some reasons or others.

    I am discussing here not whole life policies, but policies for limited term, where one pay premium for y terms and take the survival benefit at y+1.

    I did some calculation on present value method and found some interesting indication about the returns on such policies.

     – Natwar Lath Mar 20 '12 at 16:20
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    @Pablitorun No, the home-owner's policy is a one-year term contract (not necessarily guaranteed renewable) for protection (akin to term life insurance) and does not give me the full value of the house at the end of the year assuming the house is not destroyed during the year. The OP wants to evaluate whole-life insurance policies as an investment vehicle, and to evaluate return, one must know what the cost of the underlying term insurance is, regardless of whether the insurance is irrelevant to the client. See mhoran_psprep's answer also which raises the same point. – Dilip Sarwate Mar 21 '12 at 12:21
  • @DilipSarwate I know nothing about insurance in India so I will refrain from commenting further, but my contention still stands I believe. Every insurance product is a speculative bet. The fact that it isn't necessarily speculating for profit is besides the point. – Pablitorun Mar 21 '12 at 14:06
  • @Pablitorun The question is very simple and I am looking very simple answers. Both are not attached to a particular country. How I evaluate an insurance product financially? – Natwar Lath Mar 22 '12 at 02:28
  • I agree with @DilipSarwate's first comment above. Whole life is almost never a good deal for the consumer. Life insurance is a protection for your surviving beneficiaries, to make sure they can continue to live, in the absence of your income, should you die prematurely. It should, in nearly all cases, be term insurance, just like homeowner's insurance. You can get level term that keeps premiums fixed for a number of years, or just standard renewable term that will step up in premium as you age. Use other vehicles, like no-load mutual funds, for investing. – Rick Goldstein Apr 17 '12 at 16:50

2 Answers2

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Not commenting on the wisdom of various types of life insurance, here's a strategy to help you make a comparison between various insurance options with investment.

  • Get quotes from insurance companies that provide term life insurance. (This is insurance that does not include any investment portfolio.)
  • Compare the cost of buying a death benefit only vs. the cost of the other insurance options.
  • Term insurance should be cheaper, so figure out the future value that you would end up after investing the difference in cost (versus using insurance as the investment vehicle).

In general, you will pay more to invest via an insurance policy (at least in the US and Western Europe). But there are tax and other situations where insurance makes alot of sense too. You really need to consult a more authoritative reference specific to India to make the decision that is right for you!

duffbeer703
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I think the aspect of calculating the value of a life insurance policy has been addressed in plenty of detail in the other answer/comments, but I wanted to add a note that came up in the comments to this answer. When you're considering life insurance policies from multiple companies, you'll also want to look at the company's rating with AM Best or a similar rating agency, e.g. Standard and Poor's. These are ratings like A++, A, etc. that measure the financial strength of the company, and since you often hold a life insurance policy for an extended period, you don't want to purchase it from a company that may go bankrupt and disappear before the term expires.

This is also another way to verify that the company is legitimate, because a small company that might not be as legitimate as a major insurer either won't have a rating (because it's too new or won't publish the information) or will have a low rating because there isn't enough data to gauge its prospects yet.

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John Bensin
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