Do you know how to choose life insurance? Many people think that only the elderly need life insurance policies, but life insurance is equally, if not more, important for the young and middle-aged. Read of for details on how to choose the best life insurance policy for you.

No one wants to think about life insurance. Many people fail to buy it out of sheer denial or even superstition. Without life insurance, however, your family could face financial hardship after you are gone. With the variety of insurance policies out there, selecting one can be confusing. Understanding the basics, such as those listed here, will help you to choose the policy that's best for you and your family.

• Despite what insurance salespeople might tell you, not everyone needs life insurance. Whether or not you need life insurance is dependent on several factors. If you are single with no outstanding debt and a good savings account, you probably don't need life insurance.

• Several reasons you should consider purchasing life insurance include:

1. You have dependents.
2. You want to cover any debts or death expenses (burial, funeral, etc.) following your demise.
3. You own a business.
4. To cover federal "death" taxes and state "estate" taxes.Insurance Information Institute: Why should I buy life insurance?

• In some cases, financial advisers will tell you to use life insurance as a form of investing your money. However, other advisers will tell you to not get life insurance and invest your money elsewhere. Make sure you seek out sound advice before making a decision.

(Creative Commons photo by Leonid Mamchenkov)

• Once you have decided that you need life insurance, you will need to calculate how much life insurance that you need. The sad fact is that most people do not have enough life insurance.Life Insurance Advice: How Much Life Insurance Do You Need?

• Some people will tell you that you need approximately five times your average annual income. However, there are few other factors you may want to figure into your calculations such as:

1. Any additional income that you bring in (bonuses, 401(k) contributions, etc.)
2. Any expenses that could occur with your death: funeral expenses, burial costs, etc.
3. Any additional expense that might occur because of your death such as a tax preparation, education costs (if your spouse would need to go back to school to get a job), cost of health insurance and moving expenses
4. Any money you would receive from Social Security and any life insurance policies you have from your employer

• If that seems a bit complicated, the Life and Health Insurance Foundation for Education has a Human Life Value Calculator that can help you determine how much life insurance you need.Life and Health Insurance Foundation for Education: Human Life Value Calculator You can also check out Inheritance Network's Life Insurance Calculator.Inheritance Network: How Much Do I Need?

(Creative Commons photo by Mike Baird)

• There are two major types of life insurance: whole life and term life.

1. Permanent life insurance is insurance that does not expire and has a monetary value.
2. Term life insurance is life insurance that is good for a set period. After that term, it is no longer of any value.

• Another way of thinking about it is the difference between buying versus renting a house. Term insurance is like renting a house. During the "term" of your lease, you get full use of the house and property. When you stop paying rent, you lose the house and you have not built up any equity.

• Permanent life insurance is like buying a house. You don't lose your payments and can actually cash in (or sell) your policy early or borrow against it.Life and Health Insurance Foundation for Education: Term Insurance Of course, that is a very simplistic way of looking at it.

• Life insurance policies greatly in price for two reasons.

1. The first is the type of policy it is. Term life insurance policies are cheaper than permanent life insurance policies.
2. The second variable involves the person who is being insured. Certain factors can raise your insurance rates.
   • The older you are the more you will pay.
   • Smokers will pay more than nonsmokers.
   • Overweight people will pay more than people who are average weight.
   • People involved in "high-risk activities" such as flying, sky diving, rock climbing or scuba diving will also pay more. About.com: Understanding and Choosing Life Insurance

• Permanent life insurance has higher premiums than term life insurance, but it does not expire.Inheritance Network: Insurance Comparison Permanent life insurance is good for people who:

1. Want lifelong protection
2. Want to accumulate cash on a tax-deferred basis Life and Health Insurance Foundation for Education: Permanent Insurance
3. Want their premiums to remain constant
4. Want to be able to withdraw or borrow against their policy

• Essentially, there are three major types of permanent life insurance: whole, universal and variable. However, these these three can overlap. As stated earlier, these types of life insurance policies will not lapse as long as you continue paying the premiums.

• Whole Life Insurance policies have a fixed annual premium and death benefit. Whole life insurance also includes a savings element with it that can will build up the cash value of the policy.

• Universal Life Insurance has a flexible annual premium and flexible death benefits. It gives the insurer the option of paying over the premium. That money is then credited to the cash value of the policy and earns interest.

• Variable Life Insurance is an option that can be attached to either whole or universal life insurance that allows the insured to choose what type of investment the cash-value will be placed into. It works similar to a 401(k) plan.Inheritance Network: Permanent Insurance Variable life insurance offers consumers a [greater opportunity of return] than other types of life insurance.Wikipedia: Permanent Life Insurance

(Creative Commons photo by Sarvodaya Shramadana)

• A term life insurance policy is a life insurance policy that is good for a certain period of time, usually 10 to 30 years. In order to benefit from it, you must die during that period. These type of policies have lower rates because a mere two per cent of term life insurance policies actually pay the death benefit.CompuQuotes: When To Choose Whole Life Insurance Over Term Life Most go unpaid because the person lives beyond the term.

• Term life insurance is good for people who:

1. Need life insurance for only a short period of time
2. Have a fixed incomeLife and Health Insurance Foundation for Education: Term Insurance

• There are several optional clauses that can come with term life insurance.

1. A return-of-premium term policy is one that will refund you your premium payments after the end of the term is over, providing you keep the policy for the entire term.
2. Accelerated death benefits allow you to collect a portion of your death benefit should you become terminally ill.
3. A disability waiver of premium will waive any premiums made if you become permanently disabled.
4. A conversion option allows you to change your term policy into a permanent one at any time before it expires without submitting evidence of insurability.

• Once you have decided how much and what type of life insurance you are planning on purchasing, it is time to find a good insurance agent. The best thing you can do is to shop around for the best deal.

1. Get at least five proposals in writing and compare them.
2. Do not make any quick decisions.

• Remember, you are going to have this policy for a long time. Make sure it is exactly what you want before paying any money.

• Most people don't like to think about their own death, but you cannot afford not to think about life insurance. When a death occurs, the last thing family and loved ones should have to deal with are additional financial problems.

• Introduction
• Step 1: Do You Need It?
• Step 2: How Much
• Step 3: Understanding the Basics
• Step 4: Permanent Life Insurance
• Step 5: Term Life Insurance
• Step 6: Purchase a Policy
• Conclusion

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.