| As any public speaker will tell you, death isn't what people fear most. (It's a barely respectable fourth, after the terrors of getting up in front of a crowd, divorce, and torture, in that order.) Still, contemplating our ultimate demise isn't particularly pleasant, and getting up to speed on life insurance options kind of makes you long for a nice colonoscopy. But what's a responsible breadwinner to do?
The grim nature of the topic aside, life insurance is complex.  The most straightforward type is term insurance. It works like other kinds of insurance: You pay a premium, and if the thing you're being insured against-in this case, your death-happens while the policy is in force, the insurance company will pay a specified amount to a designated beneficiary. Lately, the price of term insurance has been dropping, and it's certainly the cheapest way to get a large death benefit. But it becomes more expensive as you get older, and if you should have the misfortune of outliving a policy's term, you get nothing for your money.
A cash-value policy, in contrast, does give you some equity over the long haul. This kind of insurance comes in many flavors, including whole life, universal life, participating whole life, and variable universal life. The differences mostly have to do with the rigidity or flexibility of premiums and death benefits, and with the way the cash value accumulates. In general, a part of each premium goes into an account that may accrue interest at either a fixed or variable rate, pay dividends, or be invested in mutual fund-like subaccounts.
The money in the cash-value account is yours, and you can borrow or withdraw it according to the terms of the policy. Also, unlike term insurance, cash-value policies are permanent; they'll stay in effect as long as you keep paying your premiums. But this type of insurance comes with a host of fees and charges, and because insurers aren't very good about disclosing just what those expenses amount to, it can be very difficult to compare the costs of different policies.
Which kind of insurance should you choose? Conventional financial planning wisdom calls for you to "buy term and invest the difference"-that is, between the cheaper premiums for term policies and more expensive cash-value insurance. This has the logical effect of treating insurance as insurance and investments as investments. But permanent life insurance also has its uses, and your ultimate decision will depend on how much coverage you need and can afford, whether it will be for the short or long term, your income-tax bracket, and the rate of return you could expect on other investments with a comparable level of risk. |