I can always count on a rousing debate when I raise the topic of the need for life insurance in a roomful of financial advisors. It reminds me of a game I played as a child, "Red Rover," as the financial pros line up on either side of the debate. 

And while it is highly entertaining to listen to the "fors" and "agins," the true answer of whether or not you need life insurance is something that only you can decide for your family. It entirely depends on your personal circumstances - how good a saver and investor you are, your earning power over many years, how many children you have, as well as their ability to care for themselves, your spouse's personal employment and financial capabilities, and you and your family's general health. 

You will not have to search far to find an agent willing to sell you life insurance. But before you listen to his practiced spiel, let's dissect the basic terminology so that you will be prepared with the right questions to make the ultimate determination of whether life insurance is a necessary part of your long-term financial plans. 

The simplest form of life insurance is Term. Generally with a duration of one to 30 years, term policies pay a death benefit if you die during the term of policy. Your choices are 1) Level term (more than 90% of all term policies sold), in which the death benefit remains the same throughout the policy's life; and 2) Decreasing term, in which the death benefit declines over the years of the policy's term. 

The pros: More affordable that many other policies, especially in the beginning, as it builds no cash value. 

The cons: As you age, your premiums increase, becoming very expensive and often unaffordable over the age of 65. And if you outlive the policy, your heirs receive no death benefit. 

The second category of life insurance - Cash Value, or Whole Life/Permanent, includes numerous and growing types of insurance policies. Cash value policies include pure insurance coverage, guaranteed renewable for your entire lifetime, as well as an investment component that aims to build tax-deferred cash value. And while that component is attractive, the downside is that cash value policies require higher premiums, and can cost two to three times as much as the same coverage under term insurance. In the first few years of the policy, most cash value plans charge a hefty, but declining, surrender fee if you cancel your policy. And the cash value builds up very slowly in the initial years, accelerating as times goes on.  

Whole Life generally insures policy holders up to age 100 and pays a death benefit. 

Here is a sampling of Whole Life insurance plans:  

1. With Traditional Whole Life, both the death benefit and premium are designed to be fixed throughout the life of the policy. And while the cost per $1,000 of benefits climbs as you age (especially after age 80), the insurance company is able to maintain a level premium because it charges higher-than-needed premiums during the early years of the policy. At any stage of the policy life, when overpayments reach a certain level, they are required to be available as a cash value to the policy owner if he opts out of continuing with his original plan.  

The pros: You build cash value on a tax-deferred basis, and you may accumulate enough cash value to stop paying premiums by a certain age or to borrow against the policy, on a tax-advantaged basis. And your premiums are level during your lifetime.

The cons: You have no choice of how your premiums are invested. And there is no flexibility in the premium amount or the face value of the policy - they are fixed for life. Consequently, you are locked in, even if your financial circumstances change. 

2. Universal Life; also called Flexible Premium Adjustable Life Insurance, is more flexible and features a savings vehicle that grows, tax-deferred. The insurance company invests a portion of your premiums in bonds, mortgages and money market funds. The subsequent return on investments is added, tax-deferred, to your policy. This plan features a guaranteed minimum interest rate (usually around 4%) and two death benefit options: 1) Pays out of the policy's cash value; or 2) Pays the face amount of the contract plus any accumulated cash value. This last option, obviously, will cost you more in premiums.  

The pros: Allows flexibility to adjust your death benefit and premiums, as your financial situation dictates.

 The cons: There's a risk of your policy lapsing if your premium payments are too small for too long. And if the insurance company's investments don't fare well, your return will decline, your cash value will likely decrease, and you will be forced to pay more premiums in the later years of the policy. 

Variable Life, also called Variable Appreciable Life Insurance, gives you the ability to invest a portion of your premium dollars in a separate account of various investment funds such as an equities, bonds, and/or money markets. The value of your death benefit and cash value will increase or decrease, depending on your investments' performance.  Most policies guarantee that your death benefit will not fall below a specified minimum, although your cash value is usually not guaranteed. Because of the investment option, this policy is considered not only an insurance policy, but also a securities contract and is regulated under federal securities laws. 

The pros: You have more control over your investment options. Earnings are not taxed until you surrender the policy. And interest earned on these investments may be applied against the premiums, potentially lowering the amount you pay out-of-pocket.

The cons: You assume the investment risks. If your chosen investments perform poorly, there will be less money to pay the premiums, so you would have to pay more to keep the policy in force. As well, your cash value and/or death benefit could decline.  

Variable Universal Life is a combination of Variable Life and Universal Life. You have greater choices in your investment accounts. Your premium and death benefits are flexible, depending on the success of the underlying investments. A minimum death benefit is guaranteed. This policy allows you more control over the cash value, offering the opportunity to build up significant resources. And like Variable Life policies, it is also regulated by federal securities laws.  

The pros: Very flexible, the potential for building cash value is significant, and you may withdraw money or borrow from this policy during your lifetime.

The cons: This policy is more expensive than other types of permanent life insurance, and policy holders need a good understanding of the securities markets. It is deemed more suitable for younger policy owners with long-term investment horizons. 

A third category of life insurance, also a fairly new phenomenon, is Return of Premium Life Insurance. It begins like term insurance, but features one big difference: if you pay your premiums and live, you'll get your money back. According to www.Lifeinsurance.net, the ROP feature on a typical 20-year level term life insurance policy will could cost you about 30% more in premiums, but will effectively earn a 6-7% return over this time period, or just enough to earn back everything you've paid in.

The advantage for insurance companies is this: most insurance companies only begin profiting from a policy after the fifth year it's in effect, and the ROP pretty much guarantees that you will stick around for longer than that, so they easily make their money back. 

Now you have a good idea of the types of life insurance available to you. And I will leave you with some questions you will want to ponder before taking the leap:

• Do you need a policy that pays family income benefits, versus a lump sum?
• Do you desire an increasing policy (where your coverage and premiums rise) or a decreasing policy (decreasing coverage and premiums)?
• Do you want a renewable policy?
• Check for exclusions, including alcohol and drug abuse, risky sports, preexisting conditions.
• How flexible is the policy and is there a grace period before coverage is ended?
• Does the policy contain a waiver of premium, should you be unable to work?
• Can you set up the policy under a trust agreement?

As always, research all your options, and compare costs and benefits of like policies before signing on the dotted line.

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm


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