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FINANCIAL SERVICES >> INSURANCE

After deciding whether to get life insurance, the next question is what kind.

Term insurance

The most basic type, and the easiest to understand, is term insurance.

For a specific period -- it could be one or two years or 10 or more -- you pay a fixed premium annually. If you die during that period, the beneficiary collects a previously agreed-upon amount. If you don't die during the term, elves in the insurance company's headquarters chuckle maniacally as they play in a wading pool filled with the money you sent in all those years.

OK, OK, so there are no elves or wading pools filled with currency. With term insurance, if you're still alive after the term ends, your coverage vanishes and you have nothing to show for your money except the peace of mind you had knowing that your loved ones would be taken care off in the event of your demise.

If you're not rich, term insurance tends to be the best deal because you get the most coverage for the least amount of premium. Term coverage allows you to separate the money you spend for life insurance from the money you spend for retirement savings and investments. You can take out a term policy for as long as you need it -- for example, until your youngest child graduates from college -- and then terminate the coverage.

Permanent insurance: Whole, Universal, Variable

People who are wealthy enough to need to do estate planning, or who want to be forced to save and invest because they don't have self discipline, often get permanent life insurance. There are three basic types: whole life, universal life and variable life.

Whole life is like term insurance in that you have set premiums for a set benefit, but the policy doesn't have an ending date. You pay the premium for the rest of your life unless you cash in and receive the cash value as a lump sum. The cash value is different from the face amount.

With universal life, the insurer separates the death benefit from the investment portion of the premiums. The investments pay for the death benefit. No matter how well or poorly your investments do, you are guaranteed a minimum death benefit.

With variable life, the amount of the death benefit varies with how well the investment portion of the policy does.

Permanent life policies can be complex. Don't buy such a policy if you don't understand it. If the seller explains it to your satisfaction and it meets your needs, then by all means get permanent life insurance.

The next question is how much insurance to buy. That's a toughie. The aforementioned rules of thumb dictate that you buy coverage equal to some multiple of your annual income. The experts say it's much more complicated than that. You have to look at your survivors' financial needs and their potential earnings vs. your savings and investments, potential Social Security benefits, and your job's insurance payout, if any. Your life insurance fills the gap.

There are many misconceptions about finances. The average American spends more time planning their family vacation than they do their family’s finances.