There are two reasons why we may need life insurance. First, we are mortal (although some of us may deny this) and second, we have financial obligations and commitments to our loved ones, business partners, religious organizations, and/or charities.

There are two basic kinds of life insurance: term and permanent. It’s important to know how they differ in order to decide what kind of policy best meets your needs.

Term Insurance

Term insurance is the most straightforward kind of life insurance. It has one function -- to pay a lump sum to the beneficiary when the insured person (typically the policy owner) dies. There is a time period, or a term, that the policy is in force. This could be 10 years, until the policy owner reaches a certain age, or until a mortgage is paid off or children have graduated from college. You decide on the term. You pay only for the coverage you need, for as long as you need it.

Term life is the least expensive kind of policy, partly because you are not paying into a savings accumulation as you would be with permanent insurance, and partly because it is a very competitive market. Comparison shopping is easy because the product is simple.

Some common kinds of term insurance include:

• Level Term. A fixed amount of coverage with premiums that stay level or constant during the term.

• Increasing/Decreasing Term. Premiums are level but the amount of coverage (the benefit paid when the insured person dies) can increase or decrease over the term of the policy, according to the terms of the contract.

• Renewable Term. The policyholder can renew coverage at the end of the policy’s term without submitting medical and/or other evidence of insurability.

• Convertible Term. The policyholder has the option to change the term policy to a permanent policy, according to the terms of the contract.

Permanent Insurance

Permanent insurance is more complicated because it combines insurance with a savings or investment component. Permanent insurance policies usually give the policyholder access to some or all of the premiums paid. Typically, these policies remain in force until you die.

Permanent insurance is more expensive than term insurance because of the savings or investment component and other features that increase your premiums.

Some common kinds of permanent insurance:

• Whole Life. Sometimes called “ordinary life,” it’s the most common kind of permanent insurance, with premiums that don’t change, and guaranteed coverage. It usually includes something called "cash value." This is a savings or investment account into which the insurance company pays dividends on behalf of the policy owner. The policy owner has access to the cash value, usually as a low-interest loan for up to 90 percent of the balance. However, if the insured person dies before the loan is repaid, the amount borrowed is subtracted from the death benefit. The cash value of a whole life policy should not be considered as a substitute for a pension or savings plan because the investment rate of return could not be competitive with accounts that have no insurance-related expenses.

• Universal Life. This kind of policy is sometimes called "adjustable life." It is more flexible than whole life because a policyholder can adjust the premiums and death benefit, according to the terms of the contract. Like whole life, universal life policies have a savings component or cash value. When a sufficient amount of money has accumulated in the account, the policy owner also has the option of using it to contribute to premiums, thus decreasing his or her installment payments to keep the policy in force. This flexibility has its drawbacks. Policyowners must make sure they are paying sufficient premium, based on current and guaranteed contract interest rates, to keep the policy in force.

• Survivor Life or Second-to-Die. This is a whole life policy that covers two people and pays the benefits when both have died. This kind of policy is often used to pay estate taxes.

• Single-Premium Whole Life. This is simply a whole life policy purchased with the payment of a single or lump-sum premium, rather than multiple premiums paid over months or years.

• Variable Life This is a policy where cash values can be invested in variable sub-accounts similar to mutual funds.

Comparing the advantages and disadvantages of the various kinds of permanent life policies and their costs is complicated. The circumstances of your life can determine what type of insurance fits your needs.

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