Life insurance made easy

I’m confused as to whether I should take out a term life or whole life policy. September 26, 2002: 11:14 AM EDT By Walter Updegrave, CNN/Money Contributing Columnist

http://money.cnn.com/2002/09/13/pf/expert/ask_expert/index.htm

NEW YORK (CNN/Money) – I would like to take out a life insurance policy on my husband, who is a smoker, so I have at least enough money to cover the mortgage on our house if anything happens. My company is offering term insurance at a good price, but I’m confused as to whether I should take out a term life or whole life policy. I can’t afford a very large premium. What do you think I should do?

— Rachel Rifilato, Yorktown Heights, New York

First, let me tell you that I think your instinct to get some insurance coverage on your husband is absolutely correct. The primary purpose of life insurance is to provide support to a family in the event a spouse or other bread winner dies, leaving the household without that person’s income. But that still leaves us with the issue of whether you should buy term insurance or whole life.

Term or whole life?

Term insurance essentially provides bare-bones protection. You pay an annual premium for a specific dollar amount of insurance that your beneficiaries receive if you die while the policy is in effect. Whole life insurance, on the other hand, not only provides a death benefit like term, but also has an investment component. A portion of your premium goes toward insurance while the rest helps build the policy’s “cash value,” which grows tax deferred and which can be borrowed against if needed.

There’s another important difference between the two. As its name implies, a whole life policy remains in effect for your entire life, assuming you pay the premiums. A term life policy, on the other hand, is limited to a specific term. And although you can typically renew the coverage at the end of that term, most term policies don’t allow renewals beyond age 65 or 70.

Both types of insurance can have their place, but for most people — and almost certainly in your case — term insurance is probably the better choice. The reason is that with term you get a lot more insurance protection for the same dollar premium. In fact, for the same size policy, the premium on a whole life policy may be as much as ten times that on a term policy.

That’s because in the case of the whole life policy, not all your premium is buying life insurance protection. Some is going into the investment component of the policy. In any case, if you are looking to get basic insurance protection while holding down the premium you must pay, then term insurance would seem the logical choice.

Term terms

Assuming you go with term, you still have a few decisions to make. There are several types of term. Annual renewable term (ART) typically guarantees you can renew your contract each year without a medical exam, but the premium increases each year as you age.

Another type of term — guaranteed level premium — usually starts with a higher premium than annual renewable, but you get to lock in that rate for a specific number of years, usually 10 to 20, at which point you would usually have to take another medical exam and buy a new policy. (One caveat: some policies don’t actually guarantee the premium for the entire period, so check the fine print.)

Many term policies also offer the option to convert at some point to a whole life policy. This option adds to the premium, but it can be worthwhile. For example, if someone with a term policy were diagnosed with a serious illness, converting to whole life coverage would assure that a death benefit would be paid.

Rates on various types of term insurance can vary widely from insurer to insurer. And I would not assume that my employer’s insurer offers a competitive rate. I know that advising someone to “shop around” sounds trite. But it’s true. You should check prices offered by several insurers, taking care to assure you’re comparing the same kind of policies with the same kinds of options.

You can begin your search on the Net by going to sites such as InsWeb, Quotesmith.com and Term4Sale. You might also want to try insurers such as Ameritas and USAA that sell directly to the public rather than through agents. While you’re at it, you might want to check out an insurance calculator such as the one at our Web site to see how much insurance a person in your situation really needs.

One final thing: I don’t want to get all preachy about the dangers of smoking. I believe adults should be free to make their own decisions about how to live their lives. That said, though, I think it’s important that people realize the costs of their decisions. I’m sure your husband is aware of the health costs of smoking. But he may not be aware of the financial costs.

So why don’t you have him sit down at the computer with you as you go to some of the sites above and compare the cost of term policies for smokers vs. non-smokers. It just might be the kind of experience to scare him away from cigarettes.