Is Term Life Insurance The Right Choice For You?

By Remar Sutton
(The DCU Streetwise Guy)

Ninety Second Summary:

At some point in every adult’s life, thoughts turn to questions of life insurance: Do I need it? How much? What kind?

If you need life insurance—and that may be a big “if” — most personal finance experts recommend level term life insurance as the best option for most people. Why? Because carefully chosen term life insurance offers the greatest dollar policy value for the least cost in premium payments. Here’s a quick Q & A review of some basics to consider.

What’s the difference between “term life insurance” and “whole life insurance?”
Term life insurance is the simplest kind of “pure insurance.” It’s like your car insurance. You pay the insurance company a fixed regular payment (premium) for a fixed number of years (the term) to provide a fixed benefit to your survivors (beneficiaries) on your death. A term life insurance policy has no investment component and builds up no cash value. If you purchase a term life insurance policy for 5 years or 20 years, the insurance is in force for just that time period.

Whole life insurance, sometimes called “permanent insurance” not only covers your life but also includes some type of investment vehicle. (Terms such as “universal life” or “variable life” describe the type of investment vehicle.) Because it has an investment component, it builds up cash value tax free over the years. And you can borrow against that value before your death. But whole life insurance on average costs five to eight times more than term life insurance for the same policy value. And that’s the catch. If you need life insurance, you can usually do much better investing the difference between term and whole life in another investment such as an IRA or 401(k) fund.

Who needs life insurance? Do you?
The basic purpose of life insurance is to protect the people who depend on your income — your spouse and children or other family members. If you die, the insurance replaces your lost income. So if you are single without dependents, for example, you probably don’t need life insurance. If your children are grown and you and your spouse have adequate secure retirement funds, you probably don’t need it. Look carefully at your whole financial picture before deciding that you need life insurance.

What kind of term life insurance is best?
Some term life insurance lasts for a one-year term and is renewable annually. Premiums on such annual-renewal term (ART) life insurance tend to rise each year. The best term life insurance is level term life insurance that is available for terms of 5 to 30 years with level, fixed premium payments.

Does age or health affect qualifying and cost for term life insurance?
Yes. The younger (and healthier) you are when you buy term life insurance the lower the premiums for the same policy value. As you get older, premiums go up. Things get more expensive as you head toward age 60 and beyond. After age 70 you may not be able to get insurance—or at least insurance that makes financial sense. Make a note that life insurance is not a substitute for good retirement planning.

How long a term do you need?
Again, that depends on your individual situation. If you have young children, you might want coverage until they are out of college and independent, so a 15 or 20 year term might be right. Or maybe you just want to protect your income for your partner until you reach the early retirement you’ve planned, so a 10-year term policy might be right if you’re forty-five or a 30-year policy if you’re twenty-five.

How much insurance do you need?
Answering that question goes beyond the scope of this brief report. But a couple of the websites below offer tools to help you assess your needs.

Researching Term Life Insurance Online

CNN and Money Magazine’s online primer “Money 101” offers an excellent overview of life insurance. Learn more about the pros and cons of both term life and whole life insurance. The site also offers a basic calculator to help you estimate the size policy you may need to be adequately insured. The site offers info without pushing products.

Check out “Five Life Insurance Myths” on the personal finance pages at ivillage.com.

You can also compare quotes on various policies and companies online. DCU Financial offers a service called IQuote, which along with providing policy comparisons, also offers an insurance calculator and a glossary of insurance definitions. You can also compare quotes on sites such as Quotesmith.com and Quicken.com. Before using them, like any site, make sure you are comfortable with their privacy policy and that you have previewed what the sites have to offer.

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So, what do you think? If you find this review helpful, please pass the word to your friends. Also email Remar with with any comments or suggestions. -Remar Sutton