Life Insurance - Term or Cash Value

When shopping for new or replacement life insurance you need to know what type of coverage to buy. For most situations, term is a better option, but not always. Educate yourself on the two types of life insurance and ask lots of questions when buying a new policy. Here are a few things to consider:

Term Insurance
Pros
- Term insurance provides a set amount of coverage for a set amount of time (term).
- Term is less expensive than cash value/permanent insurance.
- Term can rates do not increase during the policy period/term.
- Term insurance is pure insurance and does not involve surrender charges, maintenance fees, and other costs typically associated with cash value policies.
- Term insurance pays the full face value of the policy if the insured dies.

Cons
- At the end of the term you may not be insurable or the premiums may be extremely high due to increased age or health issues.

Cash Value Insurance
Pros
- The coverage and premiums remain constant even if you have had a major health event (i.e. heart attack, cancer).
- In some cases, the cash value in the account is enough to cover premiums and would eliminate the need to pay for the life insurance in the future.
- Cash value policies provide a dual purpose of paying for life insurance while investing at the same time.

Cons
- The life insurance provided is expensive - you can get 3 or 4 times of term coverage for the same cost
- Annual fees and maintenance costs are extremely high, and most policies contain a surrender charge if you cancel the policy.
- Your cash balance is not really your cash balance.
* If you die, the face value of your policy is reduced by your cash balance (i.e. you have $100k cash value life insurance policy with a $10,000 cash balance. Upon your death you would receive $100,000 - not the $110,000 you should receive.
* If you borrow all or part of your cash balance, you can be required to payback the loan with interest - TO THE INSURANCE COMPANY!
- The savings vehicles inside the cash value policies are expensive and often have marginal returns at best.

Ideally, if you are proactive and disciplined, you can buy the right amount of term insurance and invest the difference you would pay in No Load Mutual Funds. See for yourself. Get a quote for $100,000 of Cash Value/Permanent life insurance. Ask what the maintenance fees, surrender charges, surrender period, and other fees associated with the policy would be. Then ask for the 5 & 10 year returns of the mutual funds the agent says you will invest in via the Cash Value policy.

Then go to an on-line service like Select Quote www.selectquote.com and get a quote on a 20 year term policy with a face value of $100,000. Now take the annual savings and multiply that by 20 years and see how much you could invest. Also, consider the fact that the term policy does not have annual maintenance fees or surrender charges. You can cancel the term insurance at anytime without being charged a surrender charge.

The bottom line is, you should always purchase financial products like life insurance - never allow someone to sell them to you. Life insurance agents are very good at accentuating the positives of cash value (high commissions for them and very profitable for their company), but do not typically tell you the whole story. Educate yourself while you are shopping and ask lots of questions

There are several great articles on financial websites. I ran across the following article on MSN Money

http://articles.moneycentral.msn.com/Insurance/InsureYourLife/TheRagingDebateOverTermvsWholeLife.aspx