Mellody's Mail: Life Insurance Choices

— -- Q U E S T I O N: I'm 38 and I want to know if I should buy term life insurance. What is term life insurance and how does it work? My mate has insurance on his job — is that enough?

A N S W E R: Essentially, life insurance helps to ensure that your debts will be covered and your dependents will have the financial resources to run the household without you. I can give you some general guidelines about insurance, but more specifics could only come with exact information about your spouse's insurance coverage.

Whether you need life insurance depends upon a variety of factors. If you have no dependents and little outstanding debt, you may not need it. However, people with dependents — such as children, non-working spouses and elderly parents unable to care for themselves — are strong candidates for life insurance.

If you decide you need life insurance, you then need to determine which type is most appropriate, as well as the amount of coverage necessary given your situation. Although recommendations vary, the general rule of thumb is to carry life insurance coverage of four to 10 times your annual gross income. For example, if you make $25,000 per year, you should carry a minimum of $100,000 in life insurance coverage.

When considering type of life insurance, you have two overarching choices — term insurance and permanent insurance. The difference between term and permanent insurance is similar to the difference between renting and buying a home. With term insurance, similar to a renter, you pay for something that ultimately is not yours to keep.

Term insurance provides coverage for a specific time period, also called a "term" — it can be five years, 10 years or more. During this period, you pay regular fixed payments, also known as premiums, to the insurance company. In exchange for these payments, you are essentially renting a safety net for your beneficiaries. In the event of your death, your beneficiaries will receive the predetermined amount of coverage you established when you purchased the insurance. However, once the term or period has expired, your coverage vanishes and you essentially lose the money you have paid to the insurance company.

On the flip side, permanent insurance is similar to purchasing a home with a mortgage — you make regular payments over a specified period of time and in the end, the insurance policy, with its cash value, is yours to keep. Although you get to keep the policy, permanent insurance is more complex and tends to be more expensive than term insurance. Generally, for those with expenses like tuition or a mortgage, term insurance is often the way to go as the premiums tend to be lower and you can ultimately cancel the coverage when it is no longer needed.