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This type of insurance provides pure death protection, for a specified period of time, for a specific premium. It has no cash value and is initially less expensive than other policies for the same amount of protection.

Some types of term coverage remain level with increasing premium.

Others have a level premium with gradually decreasing benefits.

Term insurance may be purchased in a separate policy or as a rider (supplement) to one of the other forms of policies - frequently at a discount.

This type of insurance provides protection that can be kept for as long as you live. Premiums are fixed. As the policy ages, its "cash value" increases on a tax-deferred basis. If you cancel your policy, you receive the cash value that has accumulated. While you continue to own the policy, you can borrow against the cash value at a favorable rate.

This type of insurance adds savings flexibility to the whole life concept of permanent protection. In general, a policyholder must pay a certain minimum premium (for death protection) but can increase the premium, almost at will, in order to increase the savings aspect of the policy. The cash value will increase based on current interest rates and the amount of premium going toward the savings or investment portion.

This type of insurance combines flexible investment opportunities with insurance protection. Owners have the opportunity to obtain higher cash values and death benefits by their investment results. Owners can choose between a variety of fixed income or equity alternatives and make changes in the future at no cost.

Combines all of the administrative flexibility of universal life and the investment flexibility of variable life.

Term insurance is best suited to solve a temporary need. For example, you can use the death benefits to provide enough funds for a college education or to pay off the mortgage on your house. Because it is death-only protection, it is less expensive and therefore, more attractive if you are relatively young.

Whole life insurance is best suited for older individuals with a permanent need. For example, whole life can be used to provide funds for paying estate taxes or buying a partner’s business interest if your partner dies before you.

Universal life is for those who want to maintain flexibility concerning both premiums and death benefits. It is also well suited for those who want to build up cash values conservatively.

Variable life is used by those who want to maximize their ability to use insurance as a tax-deferred investment vehicle.

A commonly quoted rule-of-thumb is that life insurance should equal at least six times your annual after-tax income. However, the real answer depends on your needs and your unique family, business and financial circumstances.

Most people buy life insurance for the following purposes:

To determine the amount of insurance you should have, it is necessary to list all of your financial needs and then perform the calculations. This is where your professional advisor can be of assistance.

Many estates, composed primarily of assets such as closely held business interests, real estate or collectibles, are cash poor. If your heirs need cash, these assets can be hard to sell. For that matter, you may not want these assets sold.

Insurance can provide the necessary liquidity for your assets. Therefore, even when the value of an estate is substantial, insurance is often purchased simply to avoid the unnecessary sale of assets to pay taxes and other expenses. The biggest purchasers of life insurance are wealthy persons. What good is a substantial estate if it is badly eroded by taxes?

Life insurance is typically owned by the person whose life is insured. That person usually pays the premiums and controls the designation of the beneficiary. However, there’s a potential problem if you own life insurance policies at death: the proceeds will be included in your estate, possibly creating hundreds of thousands of dollars of unnecessary taxes. While there are no income taxes on the proceeds, the estate taxes start at 18% and increase to 55%.

Instead, you can create an irrevocable life insurance trust. The trust owns the policies and pays the premiums. When you die, the proceeds pass into the trust and are not included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.

A properly structured trust could save you more than 50% in estate taxes on any insurance proceeds. Thus, having a $1 million life insurance policy owned by an irrevocable insurance trust could reduce estate taxes by more than $500,000. Setting up these trusts can be complicated - be sure to get professional advice beforehand - but it is certainly worth checking out.

The main reason some couples carry life insurance is to pay estate taxes. Because a properly structured estate plan can defer all estate taxes when the first spouse dies, estate liquidity insurance is not needed until the second spouse dies.

Second-to-die insurance pays off only when the second spouse dies. Because it is based on the mortality of two lives instead of one, premiums are usually significantly lower than on a standard policy.

Policies may be combined to reduce costs and suit other customer’s needs. One popular feature is the addition of an inexpensive term rider to cover the insured’s children. Another technique is to have both spouses insured by the same policy, thereby reducing the policy administrative costs.

Types of coverage may also be combined. For example, suppose a person wanted to have the flexibility of variable life insurance with its ability to increase or reduce the premiums and to shift the investments around within the accounts offered by the insurer. Also, imagine that the amount of coverage required dictated the use of term insurance. Both objectives can be achieved by adding a term rider to a variable life policy. The term premium would be low, and the coverage could be converted. This approach also works with traditional whole life and universal interest sensitive policies.

Policies are written by mutual (and a few stock) companies in such a fashion as to permit the gains from investments, mortality and operating efficiencies to be passed on to the policy owner.