An Introduction to Life Insurance

For most people, some life insurance is a necessity. It provides financial protection for your family in the event of your death, as well as peace of mind while you're alive. Some policies can provide cash accumulation, others can invest in mutual funds, while other policies simply provide financial protection in the event of death. Given the number of options, choosing the right type of insurance isn't always easy.

With many varieties of insurance on the market, the choices can seem daunting. Fortunately, when you compare them all, most life policies fall into two categories:

Permanent insurance.

This type of insurance provides lifetime coverage. Permanent life insurance can be further divided into two basic types of permanent insurance whole life and universal life.

Whole life insurance provides a guaranteed amount of insurance coverage for as long as you live. This insurance requires payment of fixed premiums (the amount you pay to keep the policy in force) over your lifetime or for a specified period. Premiums never increase, and coverage never expires. However, this type of policy is typically more expensive than other varieties, as it offers a great deal of flexibility and cash surrender value you can borrow against.

Universal life insurance also provides lifetime coverage. Part of the premium you pay to the life insurer is used to cover the cost of insurance, while the rest is available to you for investment and active management. If the investments of your choice perform well, you may be able to use the savings portion of your policy to help pay your premiums. Or you may be able to draw from the policy, in the form of a loan on the policy or a partial surrender of policy values.

However, loans or partial surrenders of policy values will reduce the amount payable to your benificiaries

Term insurance.

As its name suggests, a term policy provides life insurance protection for a set length of time, or term. Term insurance usually expires around age 75. If you die within this period, your beneficiaries receive the amount specified in the policy. This insurance is generally available for terms of five, 10 and 20 years.

Some term ife policies can be automatically renewed when the term ends. But the premium increases to reflect a growing likelihood that the insurance company will be required to make a payout. As long as you pay your premiums, you can't be prevented from renewing for health reasons. But in most cases you won't be allowed to renew past age 75 or 80.

Most term policies are convertible to permanent insurance policies offered by the same company within a certain age.

Which type of policy is best for you? It will depend on your needs (both current and anticipated) and financial circumstances. Speak to your financial advisor or insurance representative before making a decision.

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