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6 Steps to Figuring Out: Term Life or Permanent Policy?

For a man with a lifetime dependent such as a wife who did not work, it could be. Under his old term policy, she'd get nothing if he died after the policy expired when he was 66. If the couple had skimpy retirement savings, a permanent policy might make sense. Also, the current insurer might permit a conversion with no questions asked -- a benefit if the policyholder's poor health would keep him from getting a new permanent policy from another insurer.

But before signing up for such a deal, policyholders should explore several topics:

Need. Term life is ideal for people who need coverage only for a given period -- while their children are growing, for example. Ideally, the insured has investments that will grow sufficiently to cover retirement, making the investment component of a permanent policy unnecessary.

Cash value. Is the growth of this account guaranteed, or is it subject to the fate of the stock and bond markets? How does that growth compare with what you might earn on investments such as mutual funds? That may be very hard to figure out. One of the problems with permanent policies is they can be very opaque, making apples-to-apples comparisons extremely difficult.

New term policy. It could be considerably cheaper to take out a new 20-year term policy. A healthy man in his early 60s might get a $500,000 term policy for 20 years for $3,800 to $4,500 a year, about a quarter of the cost of the permanent policy. Because he is older, this new term policy would not be as cheap as the one he got in his 40s, but in exchange he'd get coverage into his early 80s instead of losing it in his mid-60s.

Investing the difference. If the policyholder chose one of the cheaper options -- a new term policy or going without coverage after age 66 -- the savings could be invested. Compared with permanent life insurance policies, mutual funds are easier to understand and compare, and money can be taken out at any time without the penalties sometimes attached to early cash withdrawals from life insurance policies.

Adviser's motives. An insurance agent who is pushing a term-to-permanent conversion may be putting his interests ahead of yours, as he could be after a juicy commission built into the new policy's hefty premium.

Competitors' offers. Before doing a conversion with your current insurer, find out what competitors would charge for a brand-new permanent policy.

Bottom line: Permanent life insurance policies can make sense for people who really need coverage into old age. For those who need coverage only while rearing their children, or until other investments grow big enough to fund retirement, a term policy is generally the best deal.

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