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Life Insurance Secret 4 Term Life is Not Pure Insurance

Written by , Tue, Dec 15 2009

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I’ve heard a lot of so-called financial experts say it, and they are wrong. Term life insurance is not “pure insurance”. Don’t be confused into a choice by the talking heads. Learn all the hidden things in your term insurance.

Term insurance is supposed to be the simplest type of life insurance. Many consider it the simplest form of insurance, period. But let’s face it, even term insurance is still confusing. There are a lot of moving parts that are not pure.

Generally speaking, a term life policy can be split into two parts, mortality costs and administration costs.

Mortality costs

Mortality costs include the cost of actually insuring against your untimely death. You probably know that life insurance companies do not set aside a million dollars for every million dollar policy it writes – that would be too straight forward. Instead, they divide the money up in different buckets. Among other costs, the mortality costs include reserve requirements, reinsurance premiums, and guarantee association fees.

The reserve requirement is the amount of money life insurance companies need to set aside to pay future expected claims. These amounts are set internally by each insurance company, but also involve a lot of oversight from each state or provinces department of insurance and the National Association of Insurance Commissioners. This cost may be the most pure part of term life insurance.

Reinsurance premiums are another component your term life payment may include. Yes, insurance companies buy insurance. After all, they understand that sometimes displacing that risk to another company is the best course of action. When insurance companies move a part of their risk to another company, they must make a premium payment to pay for the insurance. Part of term life payments may include the cost of these reinsurance premiums.

Guarantee association fees are another part of life insurance premiums that come out of the life insurance premiums we pay. Life insurance companies are required to belong to guarantee associations that help sell failing insurance companies to stronger companies. In the event the guarantee association cannot sell the failing insurance company, it will stand behind the death benefit of any policy it wrote up to a limit. As you could imagine this service, while important, does not come free.

Administration costs

Mortality costs are not the only impure cost in your “pure insurance”, administration costs come with the territory too. These include marketing, underwriting, customer service, and the cost of doing business.

Marketing costs are often the most maligned, but without them, you might not have the best life insurance quotes to choose from. Very often, companies that spend the most on marketing make up the cost in volume, leveling things out. Still, marketing may include commissions to the agent and the agent’s upline, advertising, public relations, and support staff

Many insurance companies spend the most amount of money when you apply for a new life policy. The costs associated with evaluating and issuing a new life insurance policy are called underwriting costs. These may include paying nurses, a medical laboratory, medical records, motor vehicle report, medical information bureau report, computer infrastructure, support staff, and the actual cost of printing and mailing your policy.

Finally, there is the cost of doing business. This includes the customer service staff or the phone tree you get when you call their toll-free number. The cost of doing business also includes the building they work out of, their furnishings, the technology they need to stay competitive, and the actuarial expertise they need to help figure out how to price all this stuff.

So the next time you are listening to your favorite drive-time show or watching that after-hours financial spot and they say to buy term because it is “pure insurance”, you know that is pure ....

Perhaps instead of focusing on the secret costs inside life insurance, what really matters is finding the best policy for you. If you know what is important to you and can answer a few step-by-step questions, you are one step closer. Instead of worrying about the internal costs, focus on finding the best life quotes for you today.


In Life Insurance Secret 1, I uncovered the myth that all agents have the same life insurance policies to sell.

In Life Insurance Secret 2, I unveil that insurance agents do not sell insurance for the same price.

In Life Insurance Secret 3, I dissolve the illusion that any single agent knows what is best for you.