While there are many decisions you will have to make when assessing your life insurance needs, one of the most basic is whether you need permanent insurance or term insurance. Buying permanent life insurance is like owning a home, while buying term insurance is like renting one.

There are advantages and disadvantages to both . . .

Permanent Life Insurance
Like owning property, owning permanent life insurance is usually an appropriate way for people to meet long-term needs.

Term life insurance
Like renting it only meets short term goals, and is the most basic kind of life insurance. It provides affordable protection for a pre-defined period of time, so it is often used to serve temporary protection needs. Term insurance is generally the least expensive and least complicated type of life insurance. It provides insurance protection at a low cost for a specified period of time.

Who Should Consider Life Insurance?
Young couples with or without families who need to replace lost income upon a spouse's death
Anyone with a growing family
Anyone who needs short-term death benefit protection and has temporary financial obligations, such as mortgage payments, car payments, or short-term debts
Wealthy individuals who want to help preserve their estates for future generations
Business owners who want to help ensure the continuation of their business

What is life insurance?

Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of money upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Some policies may require a medical exam.

Certain types of life insurance may also provide benefits for you and your family while you're still living. Such policies accumulate cash value on a tax-deferred basis that can be used for future needs such as supplementing your retirement income or helping provide for a child's education.

Do I need life insurance?

The ability to earn an income can be considered your family's most valuable asset because your income allows you to obtain other assets, particularly the necessities of life and, of course, the creature comforts. However, as we know, the ability to earn an income is not guaranteed. Yet, the need for income may continue for those who were financially dependent upon you. Consequently, your need for life insurance and the amount will depend upon your personal and financial circumstances. If any of the following statements apply to you, you probably do need to consider life insurance:

• You have a spouse.
• You have dependent children.
• You have an aging parent or disabled relative who depends on you for support.
• You have another loved one that you wish to provide for.
• You have business or estate planning needs that life insurance can satisfy
• Your retirement pension and savings are not enough to insure your lived ones' futures against a rising cost of living.

What are some other reasons you may want to consider life insurance?

In addition to the comfort of knowing that you have provided for your loved ones after your death, there are several other reasons you may want to consider life insurance, including:

• If your policy has cash value, the cash value may be used to help with big-ticket items such as college education or a down payment on a home. Most cash-value policies enjoy a tax-deferred status, meaning that you do not pay taxes on any cash value accumulation until you receive funds from the policy.
• Life insurance can be used to pay estate taxes and funeral expenses. If an individual dies in 2004 and his or her estate is worth more than $1,500,000, federal estate taxes at rates as high as 48% may be payable, usually due within nine months of death.  So, even if you have a substantial sum of money, life insurance can be a benefit. The proceeds usually go directly to your beneficiaries without going through the probate process.

How can I choose the policy that's right for me?

Life insurance is a long-term commitment. Before buying any policy, ask yourself these very important questions:

• How much insurance do I need? If I were to die, what would my spouse and dependents need in order to live comfortably?
• In addition to protection, what am I trying to accomplish with life insurance? Am I accumulating funds for education costs? Providing away to pay estate taxes? Do I need some additional supplemental income for my retirement or emergencies? Remember that Term life pays a death benefit only, while Whole, Universal and Variable policies can supplement your income through withdrawals or loans against a policy's cash value.
• How much can I afford to pay for a policy?
• Is the insurance company I'm considering financially secure? Do they have a good claims payment history, good customer service and competitive prices? Independent companies such as Standard and Poor's, A.M. Best, Moody's, Fitch and Weiss rate insurance companies and their publications can be found in your local library.

What are my options?

There are four basic types of life insurance to meet your individual needs.

Term life insurance is the least expensive type of coverage, at least initially, and the simplest. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time - usually one to 30 years - and usually can be renewed. The policy pays your beneficiary a fixed amount of money if you die during the term of the policy. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.

Whole life insurance provides protection as well as a cash value. The premiums remain at a fixed level for the duration of the contract. Over time, the policy generally builds up cash value on a tax-deferred basis. Many companies pay policyholders a dividend. Dividends provide both flexibility and increased value to your life insurance policy. They can add more coverage to your overall insurance benefit and can build a sizable cash value. You may prefer this type of coverage since the cash value can benefit you while you're still alive. You can use it to supplement retirement funds or help provide for a child's education - it's your money to use as you need. You should, however, keep in mind that life insurance should not be purchased solely for accumulation. Its primary purpose is protection. Also, withdrawals and/or loans will decrease the death benefit.

Universal life insurance is a flexible life insurance plan. These policies are interest-sensitive and permit the owner to adjust the death benefit and/or premium payments, within limits, to fit the owner's situation. Your net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. The monthly cost of the death benefit and policy administration is deducted from the accumulation fund. As with whole life insurance, the cash value is yours - you may withdraw it or borrow against it at any time. Read your policy carefully to understand how withdrawals may affect the death benefits. Since you decide how much premium to pay, within limits, some universal life policies even allow you to skip payments. If you skip a premium payment, the administrative and death benefit costs are deducted from your cash value. The policy stays in effect until your cash value can no longer cover these costs. Make sure you understand your annual statement so you know how much interest your policy is earning and how much cash value you have. Universal life insurance rates are subject to change, but the rate will never fall below the minimum rate guaranteed in the contract.

Variable life insurance is for those who want to tie their life insurance policy to the performance of the financial markets. You decide how your net policy values are to be invested. Your cash value may have the opportunity to accumulate more rapidly than with other cash value policies, but you incur additional risk. If market performance is poor, your death benefit may decrease, and you may have to pay higher premiums to keep the policy in effect. As with whole and universal life policies, you may borrow against or withdraw the cash value at anytime. Keep in mind that loans and withdrawals may reduce cash values and the death benefit. Read your policy carefully for any possible charges associated with these transactions. These policies are sold by prospectus, a valuable disclosure document, that you should also read carefully.

How can I conserve costs?

Here are some ways you can save money when purchasing the life insurance that's right for you.

•  Don't buy insurance if you don't need it, and don't buy more insurance than you actually need to provide for your loved ones. 
•  Shop for a competitively-priced policy while you are in good health. Don't smoke. Take care of yourself by exercising regularly and maintaining a moderate weight.
•  If you buy term insurance, look for guaranteed renewable policies. That way you won't have to shop for a new policy (with higher premiums) when you're older.
•  Buy additional riders, which are optional forms of coverage, only if you need them.
•  Shop around and compare prices and coverage. There are over 2,000 companies selling life insurance policies. Get at least three quotes on comparable policies, and ask questions about the policy's renewal and withdrawal provisions.
•  Participate in your employer's sponsored life insurance program, even if you have to contribute or pay for it. This form of life insurance coverage, known as group insurance, pools good, average and poor risks to offer a benefit that can be less expensive than comparable plans offered outside of work. You may be able to obtain coverage up to a certain level without providing evidence of good health, a key advantage. Additionally, group insurance plans often provide for continued coverage during periods of disability. Many plans are administered through payroll deduction, a very convenient way to pay for coverage. And finally, many plans allow you to continue your coverage even after you leave employment by continuing payment of premiums or converting coverage to an individual policy.

What if I already have life insurance coverage?

Even if you have life insurance, keep in mind that life changes and, as it changes, so do your needs for protection. Your life insurance needs should be reviewed every few years. Any of the changes listed below should prompt you to sit down with your insurance agent to make sure your plan is still appropriate.

• You have recently married or divorced
• A child or grandchild has been born or adopted
• Your health or your spouse's health has deteriorated
• You have begun to provide care or financial help to a parent
• A loved one will require assistance or long term care
• You have recently purchased a new home
• Your children or grandchildren are about to enter school or college
• You or your spouse retired or will retire early
• You or your spouse has been promoted recently
• You have refinanced your home mortgage in the past six months
• You or your spouse has received an inheritance

Additional resources

In addition to Standard and Poor's, A.M. Best, Moody's, Fitch and Weiss rate insurance companies. Other sources available to advise you on finding a good insurance carrier include your state insurance department and the Better Business Bureau. You also can write to the Consumer Federation of America Insurance Group (formerly known as NICO), 1424 16th Street, N.W., Suite 604 , Washington , D.C. 20036 , or call 202/387-6121. It has several informative publications and will, for a fee, help you evaluate a policy you are considering. Before buying any life insurance product, remember to read the policy carefully and get answers to any questions you may have.