It's 2 am. You are up late, again. Yet another commercial comes on showing images of happy families on picnics and grandparents playing with grandchildren. Thoughts of work drift to thoughts of your family. You begin to worry about the future, your family's future. Just then the TV blurts out - Life insurance for just pennies a day! No one turned away! Your policy can never be cancelled! Take care of your loved ones!

Pennies a day? You spend much more than that on daily trips to the coffee cart. How could you not get this insurance? You feel the urge to get insured and almost reach for the phone to dial the number at the bottom of the screen. Then you realize that you don't know the first thing about life insurance or if you even need it.

There are different types of life insurance policies for different purposes. It is important to familiarize yourself with the basic policy types so that you can make an informed decision based on your needs, family situation and financial situation and not some late night infomercial.

Who should have life insurance?
You should consider getting life insurance if you have dependents to provide for after your death. 

What are the major types of life insurance?
Insurance policies are either Term (temporary) or Perm (okay its permanent–but a rhyme is always nice).

Term Life Insurance Policies
Term Life insurance policies, are generally cheaper than permanent policies and only last for a set period of time. People choose Term Life insurance policies, also called protection policies, to protect beneficiaries during certain time of their lives. For example, if you are concerned that you may die while your triplets are about to graduate from boarding school and enter Princeton with nary a scholarship in sight, you might consider a term life policy. If you have named them as your beneficiaries and pass away while the policy is in effect it can cover the cost of their tuition bills. Each term life insurance policy has a face value - which is the amount that will be paid to the beneficiaries if the insured dies, so make sure that the face value is equal to the estimated needs of those left behind.

Many insurance companies issue term life policies in five year increments and allow renewals after the policy has expired. However, since renewal rates adjust according to your age and health the premiums ray rise significantly. Because the coverage is temporary and can be costly to renew, a term life policy should not be the only life insurance policy you have if you have want a secure future for your loved ones.

The premiums on term policies are low in part because the insurance company is gambling that you will outlast the terms of the policy. If this happens then the policy will not pay out any benefits. So, you will lose all the money that you have paid in premiums ,but on the bright side – you are alive.

Permanent Life Insurance
Permanent life insurance never expires and provides coverage as long as you continue to pay the premiums. With few exceptions, premiums remain relatively stable throughout the life of the policy. When the insured dies the benefits are released to the beneficiaries at the amount determined in the policy. The premiums paid for permanent insurance can become a source of income which is why these policies are often referred to as investment policies.  Insurance companies use the money from premiums to make investments. Often the investments are very conservative, so the rate of returns might be less than you would expect but the goals are different. You can tap into the earned cash value of the policy by borrowing against it at a rate determined by the insurer. This rate is usually lower than what you might find at a traditional lending institution since, in a way, you are borrowing money from yourself. Insurance companies also issue dividends to permanent policy holders when the price of the premiums exceeds that of administering the policy.

Life Insurance for the Living: Endowment , Universal & Whole Life Policies
Endowment, Universal & Whole Life policies are types of permanent insurance polices that can serve as investment vehicles because they build up cash value over time and pay dividends. With an Endowment Policy you can have your cake and eat it too or someone else can and the insurance company won’t even get to lick the icing. An endowment insurance policy is a type of permanent life policy that pays the insured individual if he or she outlives the life of the policy. The same policy also pays the beneficiary if the insured dies while the policy is in effect. So whether you live or die the policy pays.

Whole Life insurance does what you would expect–it covers you for your entire life as long as you continue to pay the premiums. When you die, the face value of the policy is released to the beneficiaries. Some Whole Life insurers will allow you to pay your entire premium up front or accelerate your premium payments to decrease the number of premium payments.  A Universal Life policy is a direct investment vehicle that also provides death benefits. Universal Life policy holders pay premiums that exceed the price of the policy. The excess amount then gains interest just like cash in a bank and can be invested just like cash. There is more flexibility in this type of policy as both the benefits and premiums can be adjusted throughout the life of the policy.

Whew! That is a lot of terminology to digest and unfortunately it is just the beginning. Choosing the right life insurance is a difficult but important task that significantly affects the security of your family and dependants if you are no longer around to look after them. Once you feel you are ready to buy a policy it is a good idea to begin contacting life insurance brokers for assistance. While you are considering life insurance it might be a good time to begin thinking about other ways to protect your assets including your most important asset – the ones you love. Start by reading our articles on health insurance, wills, homeowners insurance and liability insurance.