Last Updated May 25, 2010 5:49 PM EDT
In theory, you might assume that you won't need insurance after 20 years. Your kids will be grown and you'll have enough savings to support your spouse if you die prematurely. In practice (and after a lost investment decade), not many people fit that imaginary profile.
For example, maybe you married late, or remarried, and have young children. Maybe you lost your pension or part of your savings through bad luck or bad investments. Maybe you didn't save at all.
The answer is not to buy "permanent" (cash-value) insurance in place of term when you're young, or even in tandem with term insurance. Cash-value coverage is far too expensive for breadwinners who need large policies to protect their families.
Instead, plan on buying new insurance when your term policy runs out. You have three choices-two of them affordable and one for desperation only:
1. If you're in good health (or good enough), shop for new level term insurance. You'll have to pass a medical exam - which the majority of buyers can -- and pay the appropriate premium for someone of your age. You probably won't need as large a policy as the one you bought when you were young, which helps hold down the price.
Don't automatically buy from the same company that insures you now. Another insurer might be offering something cheaper. A good place for comparison shopping is the website http://term4sale.com/
2. If you're in poor health, convert your existing term policy to permanent insurance. You'll be offered whatever types of conversion policies the company has on its shelf at the time. There's no medical exam. You'll pay much more than you were paying for term insurance but can limit the cost by buying a smaller policy. That should work, because you're older and don't need as many years of protection as you did before.
Good timing is important! You must convert within the time period that the term policy allows. Some 20-year policies keep the window open only for the first 10 years. Check this with your insurance agent or read the policy yourself. If you wait too long, you lose your chance.
But don't convert any earlier than you have to. Say, for example, that you have a heart attack half way through a 20-year term policy. Your agent might urge you to switch to cash-value coverage right away. But why? If you die, your heirs will collect on your current term policy. If you live, you might be considered a better risk 10 years from now than you are today.
3. If you're in poor health and missed the deadline for switching to permanent insurance, you've got trouble. You can renew your expiring level-term coverage without a health exam but only at incredibly high premiums. Worse, the cost will jump every year, by large amounts. This is worth doing only at death's door. You probably won't be able to sustain the cost of the policy for very long.
So think about future coverage well before the end of the term. If you suspect that you won't be able to pass a health exam, convert your term policy to cash-value coverage while you still can.
A warning when you're buying term:
An agent might encourage you to buy 10-year term, even though you'll need coverage for 20 years or more. That lowers your premiums for the first 10 years, but you have to buy a new policy (paying a new sales commission) for the second 10 years. The agent will show you a "reentry" price, but might not tell you that (1) it's not guaranteed and (2) to get that coverage, you'll have to pass a medical exam, says Bob Barney, president of Compulife Software, which provides agents with software for pricing term life insurance.
Thumbs down on agents like this. If you need 20 years of coverage, buy 20-year term. If you expect to need coverage for 30 years, buy 30 year term. And stay away from cash-value insurance for family coverage unless, at the end of the term, it becomes your only choice.
More on MoneyWatch:
What's the Best Kind of Life Insurance to Buy?
Nesting: Buying Life Insurance