Ask the Life Insurance Expert

I'm 38 years old and have a term life insurance policy I bought four years ago. I'm debating whether I should buy a second policy. Should I follow my insurance broker's advice and buy whole life, or should I get another term life policy?

The answer depends entirely on your needs and whether you think you need temporary protection, or you want coverage no matter how long you live.

Term life provides coverage only for a certain number of years, and it has no cash value. It pays a death benefit to your beneficiary if you die within the term. Once the term expires, the policy pays nothing.

Whole life is a type of permanent life insurance. It covers your entire lifetime and features cash value, which grows over time. The premium and death benefit for whole life are fixed, and the rate of return on the cash value is guaranteed. You can borrow against the cash value or you can surrender the policy for the cash value (although you may pay fees to surrender the policy). Whole life is more expensive than term life because it's permanent and because of the cash value component.

You need to consider some important questions before you buy your next policy.

Who would suffer financially if you died, and when would those dependents be vulnerable? Many people buy term life to cover those crucial years when their families have debts to pay and children to support. They time the term to expire after their children have graduated from college and the mortgage is paid off. The insurance is designed to help replace the income or pay for the services you would have provided.

Permanent insurance, such as whole life, is a good way to go if you want to provide for a dependent no matter when you die or if you have a large estate to protect for your heirs. The death benefit can be used to pay the estate taxes, so the estate remains intact for your heirs. Beneficiaries pay no federal income tax on life insurance benefits.

Some people decide term life is the only insurance they truly need, while others opt for a combination of term life and whole life insurance. Talk to a trusted financial adviser about the various options and which one is best for you.

For more, see Term vs. perm life insurance: Which one is right for you?

Last updated: Mar. 16, 2012
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