Insurance Basics
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What kind of policy do you need?

All life insurance policies are not created equal. And that's where it can get confusing.

Some policies offer straight insurance. You buy it, you pay the premium and if you die before the policy expires, your beneficiaries collect. Other types have accounts attached designed to offset the premiums later in life or even alter the face value of the policy based on the performance of selected investments.

So how do you know what to buy? First, take your time. Do some research to learn the pros and cons of whatever you're considering. Talk over the options with your family, and ask anyone who helps you with finances. Make a decision only when you have a good understanding of the policy and what it will (and will not) do for you.

Here's a quick glance at the major types of life insurance:

Term: Term is the simplest form of insurance to understand and the type most financial experts recommend because it allows you to purchase the most coverage for the least amount of money. How it works: You purchase a policy for a specific amount that will cover you for a particular time period (or term.) In the meantime, you pay the premiums and if you outlive the term of the policy, it simply evaporates. With "level term," the face value of the policy stays the same. With "decreasing term," the face value of the policy drops as you age.

Whole life: Rather than covering you for a part of your life (as with term), whole life will cover you for your entire life, as long as you keep up the premiums. Whole life coverage is more expensive than term, and part of the premium will be set aside in an account designed to help cover the cost of the premium as you get older.

Universal life: This is considered a form of whole life because it covers you for as long as you make the premiums. It also contains an account component. The company invests a portion of the premium, usually in bonds or mortgages. (In one variation, known as "universal variable," you choose the investment vehicle.) Depending on the type of policy, your beneficiaries either receive the face value of the policy (the account offsets the cost of the premiums), or the face value plus the cash value of the investment account (a more expensive option for the buyer). You may also be able to increase the value of the policy if you pass a required medical exam. The face value can rise and fall with the value of the investments.

Variable life: This is very similar to universal variable life, but usually offering more investment options, including stocks, bonds and mutual funds. The face value will rise and fall with the value of the investments.

Life insurance types at a glance
Term Life
  • Most coverage for the least amount of money
  • Coverage for a specific amount of time

Whole Life
  • More expensive
  • Covered for entire life as long as premiums are paid

Universal Life
  • Pay premiums and insurance company invests a portion in an account
  • Face value rises and falls with value of the investment
  • Can increase policy value with medical examination

Variable Life
  • Similar to universal but with more investment options

"We almost always recommend term," says Owen Malcolm, CFP, vice president and CFO of Sanders Financial Management in Atlanta. The one time he didn't: A client with a disabled son needed to know that she would not outlive the insurance policy that will give him some financial security later in his life. Malcolm's advice: Get whole life.

So look at your circumstances, get some advice and see which option would work best for you.

"It depends on your personal situation," says Alessandro Iuppa, president of the National Association of Insurance Commissioners and superintendent of insurance for Maine. "If all you want to do is buy insurance and have a lump sum come at the end, then term is the way to go. But as you age, the price will be higher for it. You have to look at it in the context of a whole financial plan."

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