Should you "buy term and invest the rest," or fuel your life insurance needs with "the power of cash value"?

Term life insurance is often touted for its "pure insurance protection," which includes none of the cash value features inherent in whole life policies. Term life insurance covers you for a specific period of time — as short as one year, or as many as 10, 20, or even 30 years. You can also buy term insurance that covers you until you reach a certain age, usually 65 or 70. Term insurance policies expire at the end of the term. If you are still alive, you get nothing. If you die before the term is up, your beneficiaries collect the death benefit.

Generally, you purchase term life insurance if you want to protect your loved ones from incurring your debts if you die before those debts are paid off. For example, if you and your spouse own a home, and you were to die tomorrow, your spouse could be stuck paying the mortgage on his or her own. However, if you had a term life insurance policy, your spouse could have enough money from the policy s death benefit to pay off the mortgage.

Term insurance does not just cover specific debts, however. If you have children or if your spouse does not work, term insurance can protect your family s finances, providing money for college and living expenses if you die before your children are fully grown.

When you apply for term life coverage, the insurance company will probably require a medical exam before issuing a policy. Some companies require a medical exam for all policies, but others require the exams only for policies with a substantial face value. The examination is basic, covering your height, weight, medical history, and blood and urine testing. With the blood and urine tests, the insurer looks for specific medical problems including high cholesterol and AIDS. Positive results could affect your premium, or even your ability to buy a policy.

Smokers, too, will pay more for life insurance, although cigar smokers usually find cheaper premiums because, technically, they do not inhale. If you smoke marijuana, but not cigarettes, you still must admit to being a smoker on the policy application, although insurers do not generally differentiate between different types of smoke inhalation. (Marijuana users must also disclose their drug use.)

As you age, the likelihood that you will die increases, which is why older individuals pay more for life insurance. However, many term policies give you the option to renew your policy at the end of the term without undergoing another medical exam. You also can lock in low premiums by asking for a "level premium" policy, which means that for a specific time period, say 20 years, your premium rate stays the same. After that term expires, your rates will increase, reflecting the increased risk that you will die.

If you do have trouble finding life insurance because of illness or a troubled medical history, you can turn to guaranteed issue life insurance coverage, also called "quick issue" or "simplified issue" insurance. Guaranteed issue policies require no medical exam, but you pay a higher premium in exchange for the guaranteed coverage. That is because the insurance company takes on more risk in insuring people without knowing their medical condition. Guaranteed issue policies can require waiting periods before coverage kicks in, and often require yearly fees, but they may be the only option for some people. A life insurance broker can search the marketplace for a guaranteed issue policy that meets your needs.

When you are researching what kind of policy you should buy, your income, short-term and long-term debts, and financial obligations to your loved ones are among the factors to consider.

Figuring out which term you should buy — 10 years, 20 years, 30 years, or some other number — requires a major review of your debts, financial needs, dependents needs, and when all these might change. Jack Dolan of the American Council of Life Insurers suggests that you ask yourself, "When will my dependents reach financial independence?" Also look at major debts, like mortgages or other loans, and at how much money your spouse or dependents would need in order to pay them off if you die.

We have constructed three common scenarios to illustrate where term life insurance might be in order:

Scenario No. 1: Jim is 30 years old, married, with no children (but planning to have kids someday), and thinks he might want term life coverage. His wife works, and they have a 30-year mortgage. Jim s group life insurance at work offers $200,000 of coverage — twice his annual income. He wants term life insurance because it is less expensive than whole life coverage he has been offered, but does not know how long his term should be.

"It is quite common to supplement group coverage with individually purchased life insurance," Dolan says. "Term life is attractive to many people because it is inexpensive, and the longer the term, the lower the premium. If it is too expensive to purchase whole life insurance now, he could convert his term policy to a permanent one later on when he can better afford the premiums."

With a 30-year mortgage, and children potentially on the way, Jim might want to consider a term of 30 years for his life insurance. At the end of that term, he could convert the coverage to a whole life policy, which might be attractive to Jim because he and his wife are in a high income bracket and might want permanent life insurance to help them with estate planning needs down the road.

In any case, there is no guarantee that Jim will stay in his job, and thus retain his group life coverage forever, so purchasing individual coverage might make sense. As for the amount of coverage, that depends — it should be enough so that Jim s wife can pay off the mortgage, and meet other expenses, if he dies. And if they decide to have children, it should be enough to pay for their living expenses and college education.

Scenario No. 2: Martha is 43. She earns $40,000 per year and her husband does not work. They have two children, ages 10 and 15, both of whom will attend college. The family mortgage will be paid off in 15 years. Should she consider term life insurance, and for how many years?

"This is not a high-income family, so term life might be good for them. It would address the life of the mortgage and the kids college expenses," Dolan says. At 43, Martha probably has 25 years before she retires, so a policy that would replace her income for the family for at least that long is probably in order.

Dolan also says that different policies might be a good fit — one 15-year term policy to cover the life of the mortgage, and a separate, 25-year policy to cover other expenses such as college education for the kids. "There are companies that will tailor the product to your needs, or offer you different solutions," Dolan says.

Scenario No. 3: Alan s 20-year, level premium term policy is about to expire. He is 58, and he and his wife both plan to work for another seven years before retiring. They do not have any outstanding debts, and their two children are out of college and on their own. Alan is unsure whether to renew his term policy, convert to permanent life insurance coverage, or drop life insurance altogether.

In this case, Alan s decision depends on his reasons for owning term life in the first place. "If this life insurance policy is going to replace lost income, maybe they should keep it in place," Dolan says. "If these two are relying on each other s income, they might each need a policy to replace that income if one of them dies. On the other hand, maybe the policy was meant for the children, and they have all left the house and are financially independent. If that is the case, maybe they do not need the policy."

"If you are purely interested in financial protection for your family, that is what life insurance is designed for. So when your children are grown, reconsider your life insurance needs," Dolan says. You may still need coverage if a spouse or other relative depends on you; but on the other hand, you may be able to scale back on the amount of life insurance you own.

"Perhaps you want to leave assets for your heirs, or for charity, or you need the death benefit for business planning purposes. These are all areas where life insurance can play a role, but it is really designed for financial protection," Dolan says. For that reason, after you have purchased life insurance coverage, you should periodically evaluate whether your current coverage amount is still right for you.

Variable universal life insurance (VUL), a form of whole life insurance, is popular because it offers a pool of money known as cash value that builds up with interest over time. The interest earned is based on the performance of the stocks, bonds, and mutual funds in which you choose to invest the cash value. Some financial planners advocate VUL policies because they force you to save money in the cash value component. Others recommend that you buy term insurance for the cheaper premium, then invest the money left over in mutual funds or other investments. Many wealthy people opt for a VUL policy because it can help their beneficiaries pay the hefty estate taxes when they die. VUL also allows you to change your death benefit — and subsequent premium payments — over time.

However, cash value in life insurance should not be considered a traditional investment because any partial withdrawals or loans will reduce your death benefit. Also, if you partially withdraw or take out a loan against your cash value, and the cash value exceeds the premiums you have paid into the policy, you will be hit with a tax bill. In addition, every year that you own the policy, more of your premium money goes to pay for the cost of insuring you, and less of it goes toward the cash value.