Life Insurance 101

Life insurance has no one-size-fits-all option. Singles with no dependents often need little or no coverage. But it can be an important purchase for people whose families depend on their income to cover daily living costs, mortgage repayment, college, retirement or other major expenses.

According to Larry Davidman, owner of online insurance brokerage TermWorks.com, life insurance needs often change as family circumstances evolve. "Once you start a family, you'll probably want to beef up coverage," he said. "But after the kids are on their own, your house is paid-off and your retirement is well-funded, you may feel comfortable amending your coverage."

In my family's case, we bought term life insurance shortly after our son was born and added supplementary policies when our daughter arrived. Our goal was twofold: Provide my wife at least 10 times my income if I should die; and help me cover childcare expenses should she go first.

Because our initial 10-year policies expire soon, we've been reexamining our needs with Davidman's help. If you're also looking, here's a brief overview of common life insurance options:

There are two broad categories of life insurance: term and cash value (permanent). Costs are based on such factors as your age, gender, overall health, family history, driving record, hazardous activities (like skydiving) and foreign travel habits.

Term life is the simplest and least expensive type, since it pays your beneficiaries only if you die while the policy is in force. Term periods usually range from 5 to 30 years. Premiums increase according to your age and overall health, but several other features can also affect the cost and benefits received.

Cash value products let you build cash value that grows tax-free and that you can potentially borrow against (also tax free), subject to certain limitations and based on product and design. The cost is significantly higher than a term policy with the same death benefits. Common varieties include:

• Whole Life, which provides lifetime protection with locked-in, guaranteed premiums, death benefit and cash values. It's usually the most expensive type.
• Universal life offers the same fixed investment performance as whole life but greater flexibility in terms of premium payment schedules, duration of guaranteed death benefit and accumulation of cash value.
• Variable universal life (adjustable life) lets you invest the cash-value portion in securities (stock funds, bond funds, money market, etc.), which have greater growth potential but also carry greater investment risk than fixed accounts. Poor fund performance can reduce the cash value and/or death benefit.

A few additional considerations:

• If your term insurance is expiring and you're in poor health, ask about converting to permanent life. Premiums will be higher, but you won't have to pass a medical exam.
• Interview several insurance agents to gauge their experience and ability to explain complex products. Then compare recommendations they give for your particular circumstances.
• Ask your broker for a breakdown of commissions and administrative fees and ask your tax advisor about any tax implications.
• Don't buy life insurance solely as an investment tool.
• Be completely truthful on your application. Lying about an underlying condition could cause the insurance company to alter your death benefit or rescind the entire policy.

To learn more about the different types of life insurance available, read the Buyer's Guide posted on the National Association of Insurance Commissioners' website, www.naic.org.