Term versus Permanent Whole Life: Find the
Life Insurance that's right for you.

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No one likes to spend money now on something they hope to avoid using for many years in the future. But the older folks get, the more they realize that life insurance is something that should not be put off until the moment when the grim reaper seems to be lurking in the shadows.

Primary types of life insurance

The two most common forms of life insurance are Term and Whole Life. While you will hear criticism of both, they are equally useful when chosen according to the needs of the individual.

The Case for Term Insurance

Term life insurance is best (and cheap) for younger people whose primary concern is protecting a mortgage or other large debt and for providing for a spouse and children in the event of the death of the primary wage earner. It is also a good choice for a small business owner who needs to protect the business interest in the event of the loss of one of the principals.

Do not purchase term insurance if....

• you are close to retirement and need final expense coverage or a fund that will provide your heirs with a way to pay taxes on your estate.
  
  
• your primary purpose for the insurance is investment that you may be able to surrender or exchange in later years. Term has no cash value.

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The Case for Whole Life

Whole life insurance, as you might expect, is insurance that covers you with a level premium until you reach age 100, at which time you receive a check for the face value. It will also have a level premium and will build cash value. You always want some form of whole life if your primary purpose is to cover final expenses or to provide a legacy for your heirs.

Cashing in a whole life policy

While it is true that a whole life policy builds cash value, simply surrendering it and taking the cash is usually not your best option. If you want to stop paying a premium—say if your retirement income is not sufficient to keep paying the premium—you could take a "reduced paid up." The company will tell you how much "paid up" insurance you have purchased at that time. They will give you a certificate of paid up insurance, and you will not have to pay any additional premium. Note that a reduced paid up will always result in a reduction of face value, but will be more than the cash value of the policy.

A second, and more productive option, for cashing in a policy is to apply for a 1035 exchange with a company that offers annuities. An annuity is a retirement instrument, usually requiring a single deposit although dump-ins are possible. They pay better interest rates than most CDs, avoid probate upon your death, and give you access to your money without a loan.

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Buyer beware

Many companies send life insurance offers through the mail. About 90% of these, when targeted for anyone other than a child, are Term Insurance. That's fine, if it's what you need. However, seniors, especially, who have delayed purchasing insurance, are often taken in by the low price and do not realize that they may have a premium increase as often as every five years, and may even have a policy that only covers them until they reach age 80. It isn't pleasant to reach 80 years old and suddenly discover that the insurance you have paid on for 20 years is either expired or priced far beyond your means.

The best choice? Always take the time to sit down with a reputable agent. You can ask question, write down the answer—and go somewhere else if you don't get the answer you want.