Isn’t life insurance only for retirees and grandparents? Not exactly. The basic rule of thumb is, if you have people who depend on you financially, (known as “dependents”), you need life insurance.

Your dependents will likely need financial help after you’re gone to cover things your income would normally pay for—such as mortgage payments, tuition bills, and month-to-month expenses. They may also need additional money to cover funeral costs, estate taxes or old debts. This article can help you determine how to select the right option for you.

Know Your Options

If you have dependents, there are two types of life insurance to choose from:
Temporary (also called “term”). Term life insurance lasts for a set period of time (known as the “term”, and typically somewhere between 10 and 30 years) and offers a lump-sum payment to the person you choose, also known as your beneficiary if you die during that term.

Permanent (also called “cash value”). Once you sign up for a permanent life insurance policy, you make regular payments (also known as “premiums”) until you die. In addition to offering a death benefit, permanent life also invests a portion of your premiums for you, which can then enjoy certain tax advantages the IRS has created to encourage insurance ownership. Because of this additional investment advantage, permanent insurance is always more expensive than term insurance.

There are three basic types of permanent insurance:

Whole Life Insurance. Has fixed premiums throughout your lifetime with little to no choice over how your premiums are invested.

Variable Life Insurance. Allows you to choose among different funds and reap the rewards of better investment performance if you make the right fund choices (or, feel the pain if you make poor investment choices).

Universal Insurance. Lets you increase the premiums you pay in order to grow the cash value and increase the payout upon your death.

Make Your Choice
Now that you understand the basics, it’s time to decide which type of policy makes the most sense for you. For most people with dependents, that choice is term life insurance–its policies are more flexible, easily renewed, competitively priced, and easier to understand and acquire. And because they are cheaper, they also leave you with more disposable income to invest as you choose.

Only if you are older, in desperate need of a savings plan, or without sufficient retirement savings might permanent life insurance be the better choice, because these policies force you to invest a portion of your premiums each month. However, these policies are complex, require much more money up front and in monthly premiums, and don’t offer you much say over how your money is invested. To make a final selection, you have to decide which is more important to you: simplicity and lower monthly payments (term) or accumulated savings despite a greater monthly expense (permanent).

Purchase the Right Policy
Once you’ve determined which type of insurance to buy, here are some ways to ensure that you secure the best coverage.

Decide How Much Coverage You Need. If you died, how much money would it take to replace your lost income and cover any major debts and expenses? A general rule of thumb is to get six to ten times your yearly income, but crunch some numbers yourself to be sure that’s adequate, using online calculators like the one at Bankrate.com or MSN Money.

Choose Your Term. If you’re going with term insurance, decide how many years your dependents (spouse, children, step-children, legal guardians) would need coverage in case you die. As a starting point, look at the number of years until your kids finish college or your spouse will retire.

Shop Around. Several web sites allow you to compare policies and companies with a few mouse clicks (examples include Lifeinsure.com, Intelliquote.com, and Reliaquote.com).The best insurance quote sites rate the providers based on factors such as financial strength and premium pricing (such as http://www.lifeinsure.com/insuranceratings.asp).

Take Care of Business. Once you’ve chosen your policy, fill out an application (where you determine who gets the money, aka your “beneficiaries”) and get a physical (typically paid for by your insurer) that determines the cost of your premiums.

The Bottom Line: Choosing the best life insurance policy and provider doesn’t have to be an overwhelming task. By learning the basics outlined here, determining your personal insurance needs, and researching your choices, you and your family will feel protected in no time.