 Picking between term and whole life insurance
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 Dear
Dr. Don,
Is it better to buy as much term insurance as you can rather than a whole life policy?
-- Tony Terminator
 Dear
Tony,
It's not a matter of buying as much as you can, but of having as
much as you need. While September was National Life Insurance Awareness
Month, there's nothing wrong with reviewing your coverage needs
in October.
Whole life is a form of permanent insurance that has
both an insurance component and an investment component. A whole
life policy builds cash value over time that gives you a measure
of flexibility in managing the policy. For example, you can
borrow against the policy's cash value or you can cash in the policy
in lieu of receiving a death benefit.
Term insurance allows you to purchase a lot more coverage
for your premium dollar because it doesn't have the investment component,
only a death benefit if you die while the policy is in force. Term
life insurance coverage is somewhat analogous to a car lease. You've
got full use of the car during the lease term, but when the lease
is up, you're out of the car and don't have any equity built up
in the lease.
Conventional wisdom says to buy term and invest the
difference in premiums on your own. If you have the financial discipline
to do so, there's a compelling argument for that approach. The
other side to that argument is that as you age, term coverage can
get more and more expensive.
Additional term coverage offered by your employer
tends to be fairly expensive coverage if there's no health screening
required. The high cost covers the adverse selection problem
faced by insurers who offer coverage without health-care screenings.
People with health issues are most likely to buy this coverage. The
term coverage offered by your employer also may not be portable
if you stop working for the company.
Don't rule out either type of coverage. Take
a needs-based approach to determining how much insurance coverage
is right for you. Price both term and permanent life policies --
there's more than just whole life; there's universal, variable universal
and variable life policies, as well. Consider how the premium expense
might change over time and what you want your premium payments to
accomplish.
Bankrate.com has a needs-based calculator
that can help you size up your insurance needs.
While most consumers can find a way to structure a
term policy to meet their insurance needs, it doesn't necessarily
follow that term is always the right decision. Check out the alternatives
before signing on the dotted line. Talk to a fee-based financial
planner if you need some more help making a decision.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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