Under Certain Terms, This Life Insurance Pays Off

Assuming an interest rate of 3 percent, that's $27,271.40 after 20 years, excluding taxes. If you add $75 to that annual investment of $925, you would have enough to buy an EE Treasury bond, which as of Tuesday was earning 3.7 percent. Put the money in a diversified mutual fund and you could earn even more, with added risk, of course.

You do fare better if you get a 30-year return-of-premium policy. Let's take the same 41-year-old man. A 30-year traditional term policy for $500,000 would cost about $930 a year. The annual cost for a return-of-premium policy would be about $1,425 (although keep in mind that the price you pay for either type of policy will vary greatly depending on the insurer, your age and health).

If you take the $495 difference between the two policies, the insured man would have to earn at least 6.2 percent per year to accumulate the $42,750 he would get back in premiums.

But keep in mind that if you have to cancel a return-of-premium policy before the term is up, you may only get a percentage back -- depending on the company and how long you've held the policy.

Even with its downsides, Lankford prefers return-of-premium policies over permanent life insurance.

"The problem with many cash-value policies is that the premiums -- and fees -- are so much higher than they are for term insurance," Lankford said.

The insurance costs within a permanent life insurance policy are generally a lot higher than they would be for term insurance (sometimes double or triple), and the sales fees can eat up another 5 percent of each premium. That leaves you with less money to invest, says Lankford, who has been covering the insurance industry for more than a decade.

I know the debate over term versus permanent won't end here, but I hope at least we've made the case that you don't have to feel like a chump if you opt for term life insurance.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

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