Although a difficult question – one whose answer will vary depending on circumstances – several principles should be followed in addressing this issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered:
How much life insurance should I buy?
What type of life insurance policy should I buy?
The first question involves an “insurance” decision and the second requires a “financial” decision. The insurance question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way it can be afforded is through the purchase of term life insurance (which has a lower premium).
If your ability and willingness to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the “financial” decision – which type of policy to buy. Important factors affecting the “financial decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g. over 20 years or longer), and the rate of return on alternative investments possessing similar risk.