Feb. 5, 2007

What is the benefit of term life insurance? Whole life coverage never ends as long as you pay the premiums, and the premiums never increase, as I understand it. But with term coverage does stop and the rates rise each time you renew. Also at some point (say at age 60) I may not be able to renew the policy. It seems with term life you are "guessing when you will die" or am I wrong on all of this?

Steven, Mississippi

Dear Steven,

There are a number of benefits to term life insurance, but perhaps the biggest is the price. According to LIMRA International, a financial services trade association, the premiums for a universal or whole life insurance policy could be eight or nine times more, every year, than a term life insurance policy with the same death benefit.

For example, the average $250,000 term life insurance policy bought in 2006 cost $560 per year. A variable universal life insurance policy, bought at the same time with the same death benefit, averaged $3,988 every year, according to LIMRA.

Some financial planners point out that you can earn a better rate of return than is available in the cash value component of permanent life insurance policies by buying term life insurance and investing the money you save on premiums in the stock market. This method of investing is commonly referred to as "buy term and invest the rest."

Another reason to consider term life insurance is because the ammount of life insurance you need changes over the course of your life. So while you might need a $300,000 life insurance policy to pay off a mortgage or provide for the education of children at one point in your life, you might not need nearly as much after the mortage is paid and your children had finished school.

If in this situation you had bought a whole life insurance policy, you could be stuck paying premiums for insurance that you no longer needed, but with a term policy you could provide for those expenses for as long as you thought was necessary and no more.

There are also compelling arguments in favor of buying whole, universal, and variable life insurance. Some financial planners advocate permanent life insurance policies because they "force" you to save money in the cash value component, you are often guaranteed a minimum rate of return, and this money can be used to pay premiums when you are older or on a fixed income.

By sitting down to determine who is dependent on your income, how long they will be dependent on that income, and what debts you have against your estate and when they will be paid off, you should be able to figure out what kind and how much life insurance you need.

You should read Cash value in life insurance: What's it worth to you? and use the Insure.com Life Insurance Needs Estimator tool.

Remember too that you don't necessarily have to choose one or the other. If you find that you need a certain level of life insurance protection for your entire life, but that you need more than that for the short term, you could buy a permanent life insurance policy and a

term policy.

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Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.