Term life vs. cash value life insurance

If you're single or have no dependents, you probably need little or no life insurance. With a little planning, you can establish a low-risk savings fund to cover funeral costs, and then invest the money you would have paid in insurance premiums.

If you're single or have no dependents, you probably need little or no life insurance. With a little planning, you can establish a low-risk savings fund to cover funeral costs, and then invest the money you would have paid in insurance premiums.

But if anyone depends on your income stream, you need life insurance to protect it. Aim to replace it, but don't think you need to pay a lot for a policy that will give your family a lotterylike payout if you die.

There are two main types of life insurance: "term" and "cash value."

With term insurance, your premium payments are applied entirely to the cost of the insurance, and coverage can easily be dropped when you no longer have dependents. It's a very simple and effective option.

Cash value insurance, meanwhile, encompasses a wide variety of financial products, such as whole life, universal life and variable life. These combine term life insurance with a long-term, tax-sheltered savings plan.

The most important thing to understand about these policies is that they're designed to be held for life. There are usually significant upfront charges associated with setting up the savings plan, investing the money and paying the agent's commission. Even with these charges, tax-sheltered savings can still catch up to taxed investments and begin delivering a real advantage — but that can take 10 to 20 years.

So never opt for cash value insurance without doing a lot of homework. Don't let an aggressive agent sway you with confusing presentations and emotional arguments. Remember that term life can last as long as you want, via guaranteed renewable policies. If you're attracted to the investment portion of cash value insurance, know that you can always buy less-expensive term insurance and invest the difference on your own.

Don't make the common mistakes of buying more insurance than you need, or the wrong kind of insurance. Look up some prices at www.insure.com.

The Motley Fool