What’s the difference between complex and complicated?? “Complex” means an idea or device has multiple components, while “complicated” refers to a high level of difficulty. Most of us can master complex ideas or devices if we take the time to learn their basic components. Driving is a complex task, but once you learn the functions of the steering wheel, accelerator and brake pedal, it’s not too difficult.

Unfortunately, consumers often find complex financial strategies and products too complicated. Consequently, they often dismiss options which, if considered, could substantially improve their personal finances.

This reluctance to consider complex financial items perhaps explains why life insurance, particularly whole life insurance, is frequently overlooked or avoided—even by some who present themselves as experts in personal finance. They may admit that whole life insurance can add value to a financial plan. But they frequently offset this acknowledgment with comments like “but whole life policies are too complicated.”

Is whole life insurance complex? Yes. As insurance expert R. Marshall Jones puts it:

“Until recently, permanent life insurance was arguably the financial industry’s most complex instrument.”

Is whole life insurance complicated? Only if you don’t understand the basic components.

Basic #1: The Older You Are, the More It Costs

In any life insurance policy, the cost of insurance increases with age, because the odds of dying are greater. The graph below is representative of this basic component, showing 50 years of premiums for a healthy 35-year-old male, non-smoker, for $500,000 of life insurance.

At age 35, the annual premium is $265. By 50, it is $680. After 60, the cost rises dramatically. At 65, it’s $3,150. by 84, it’s $22,580. And to keep this policy at 85, the annual premium would be $207,990!

Yearly renewable prem-iums pose a dilemma for consumers: when they are more likely to collect on the life insurance, it costs too much to keep it.

Component 2: Leveling Up

An alternative: paying a level premium. The insurance company determines a flat rate for a specified term, typically 10, 15, 20 or 30 years. The policyowner overpays (relative to the annual cost of insurance) during the early years, then underpays on the back end. For the 35-year-old male, a 30-year level premium is $490/yr. Compared to yearly renewable life insurance, this policy is more expensive for the first 10 years, then less expensive for the next 20. The “excess” premiums at the beginning are reserves invested by the insurance company, and are used to offset the higher cost of insurance later.

A level premium resolves the cost of insurance becoming progressively more expensive—during the term. But when the term expires, a new level premium is established, and once again, you are overpaying. (In our example, the cost to renew $500,000 of life insurance at age 65 is $5,025/yr.—providing the individual can prove excellent health by passing a new physical examination.)

Even with good health, the term is limited to 20 years (age 85). After 85, the premiums follow the same annually increasing schedule, the one with a renewal premium of $207,990—a year.

Level premiums may allow consumers to keep life insurance longer, but when the term ends, there’s still the same end-of-life problem: when death is most likely to occur, life insurance is often too costly to keep in force.

Component #3: Cash Value*

A policy with level premiums for one’s entire life might solve the problem. But since the cost of insurance rises so steeply after age 60, a policy guaranteed to be in-force at age 100 (assumed to be one’s “whole life,”) requires sizable annual premiums.

For our healthy 35-year-old non-smoker, this lifetime annual premium is $6,165/yr., more than 12 times that of the 30-year term policy. Even if you understand the concept of overpaying at the beginning to underpay during the later years, the $5,600 difference can be a tough sell. It seems like too big an overpayment, for too long.

Enter the concept of cash value. Remember, the excess premiums are reserve capital the insurance company can invest to generate more capital. As an incentive for policyowners to make a large, long-term premium commitment, a portion of these reserves are assigned to a cash value account tied to the policy. While the policy is in-force, the policyowner can access these cash values, through a variety of transactions. The insurance company may also add to a policy’s cash values through dividends, representing a share of profits from the company’s investments and operations.

Getting to “Aha!”

A whole life policy with a level premium and cash values provides economic certainty for consumers—they know how much insurance they will have, how much it will cost, and (as long as premiums are paid) that it will be in-force at the end of their lives, whenever the end occurs.

In a typical whole life policy, cash values and dividends may, after a while, exceed the premiums paid; the policyholder not only owns an insurance benefit, but has received a positive return on the premiums.

Besides turning a life insurance policy into a guaranteed asset instead of a likely expense, the cash value component opens the door to other possibilities. Dividends may be received as income, or used to pay future premiums. Additional paid-up insurance may be purchased. Annual premiums may decrease or be suspended.

This brief overview might not result in a life insurance epiphany, at least right away. But it might prompt better discussion the next time you meet with a life insurance professional.

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This article was prepared by an independent third party. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9 Fl., New York, NY 10017, 212-541-8800. Securities products and advisory services offered through PAS, member FINRA, SIPC. This firm is an agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian. Wealth Advisory Group LLC is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. Neither Guardian, PAS, Wealth Advisory Group, their affiliates/subsidiaries, nor their representatives render tax or legal advice. Please consult your own independent CPA/accountant/tax adviser and/or your attorney for advice concerning your particular circumstances.

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Submitted by Elozor Preil