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Whole life vs. term life insurance
I have term life insurance, but should I convert to whole life insurance?
December 18, 2002: 11:47 AM EST
By Walter Updegrave, CNN/Money Contributing Columnist

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NEW YORK (CNN/Money) - I'm a 34-year-old single mother with three young children. I have about $225,000 in term life insurance. Should I convert to whole life insurance?

-- Monica, Baltimore, Md.

I don't see why you should. What you need at this point in your life is basic insurance protection, a policy that pays a death benefit that can provide income and assets for your children in the event you're not around to do that yourself.

And that's exactly what you get with term insurance. You pay your annual premium, and in return the insurer guarantees that it will pay your beneficiaries the face amount of the policy. All very neat and clean.

A whole life policy, on the other hand, provides a basic death benefit, but it also builds up what is referred to as "cash value," essentially a savings feature that you can withdraw or borrow against.

When you pay your premium in a whole life policy, a portion of the money goes to buy the policy's death benefit, but some also goes into the cash value account. The policy also pays dividends that make that cash value grow as the years go by. (There are other types of cash value policies that pay interest instead of dividends or that even allow you to invest in mutual fund-like accounts, but these policies have a cash value account that should grow.)

Since some of your premium payment is being diverted to the cash value account, not all of it is available to buy insurance protection. As a practical matter, that means that to get the same amount of insurance coverage -- that is, the same size death benefit -- in a whole life policy as you're now getting in your term policy, you would have to pay a much, much larger premium, probably one several times as large as what you're paying now.

Other differences

There are other differences between whole life and term life. The premium in a whole life policy typically remains constant, while term life premiums usually rise over time. That said, though, you can usually lock in term premiums for as long as 20 years by buying what's known as a "level premium" policy.

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And while whole life policies remain in force, as the policy's name implies, for your whole life -- assuming you pay the premiums -- term life is usually only renewable to age 75 or so.

That shouldn't be a problem for you, though. The idea behind insurance is to provide income to people who won't have income if you're not there to provide it. So by the time your term policy expires, your kids will be adults and able to fend for themselves.

So, all in all, I'd say you've made the right choice in going with term. That said, however, you might want to check out a site such as InsWeb to learn a bit more about the different types of policy options available to you.

While you're there, you might also want to do a "needs analysis" -- essentially, a look at how much insurance you ought to have considering your family's income needs in the event of your death.

Finally, you might as well also see how the premiums you're paying compare to what other insurers are getting for the same amount of coverage. To do that, you can check out Web sites such as, Term4sale, Ameritas and USAA.

Who knows, maybe you'll be able to find a less expensive policy that will allow you to pocket some savings, or increase your coverage if your needs analysis tells you you're coming up short.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 a.m. ET on CNNfn.  Top of page

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