With a daughter on the way, my wife and I decided it was time to get life insurance.  If you have ever looked into life insurance, your head was probably spinning.  This is an industry with lots of choices, and lots of salespeople.  I will offer a cursory overview of all the different types of life insurance here.  And I will focus on Term Life Insurance and why I chose it for my family.

Why Life Insurance?

Life insurance should not be used to make your family inordinately wealthy in the case of your death.  It should be used to:

• finish paying your home mortgage or car loan.
• pay funeral costs or medical bills that might have incurred if you were sick.
• pay for child care so your spouse can continue to work.
• pay for your child’s education.

In a nutshell, Life Insurance should be used to protect your family in the event that you, your spouse, or both of you, pass on.

The Different Types of Life Insurance

I did a lot of research before settling on a term life insurance policy.  I asked a lot of questions, and met with a few financial advisers, to make sure I was doing the right thing for my family.  There are a number of different types of life insurance you can purchase: Term, Whole, Variable, Universal and Universal Variable… the choices can actually drive you insane.{openx:11}

But if you divide them into three groups, it makes it easier to understand:

Term life: is pure life insurance with no cash value account.  It is also the simplest and least expensive type because your premiums are the same for the life of the policy.  This type of policy only has one function: to pay a specific lump sum, to whomever you’ve designated, upon your death. The policy limit and death benefit are the same; a 20 year $500,000 policy pays a $500,000 death benefit for the next 20 years.  If the insured passes away one day after the policy is activated, or anytime within the length of that policy (eg 20 years for a 20 year policy), the death benefit is the same.

Whole Life: similar to term, but you purchase the policy to cover your “whole life” not just a set period, and your premiums also remain the same throughout the life of the policy.  However, unlike Term, this is not pure life insurance; the company will invest a portion of your premiums. Some of them share investment proceeds with you in the form of a dividend or will offer you a relatively low guaranteed rate of return.

Variable, Universal and Universal Variable: provide both a death benefit and a cash value account; that’s why they are sometimes called “cash value policies”. They are more expensive than Term Life, because they fund a savings account in addition to buying insurance.

Which should I choose?

Well, ultimately that is up to you.  Do your research, search the internet for more information and ask some questions.  But I will tell you what I chose for my family and why:

First I decided something important: I want to keep my insurance and investments separate. The other types of insurance all have an investment portion to the policy.  Once that decision was made my choice was clear: A 20 Year Term Life Insurance policy for me, and a 30 policy for my wife.

Here are my thoughts: I want to protect my family’s income until my retirement, and until my child becomes an adult.  I’m in my early 40’s, and my wife is in her early 30’s.  The policies we took out will protect our family until our early 60’s.  By then we will have built up other savings and investments preparing for our retirement.  These savings will be available to our family upon our death.  Even our IRA can be converted to an Inherited IRA, and become immediately available to our offspring if they wish.

What Company Should I Choose?

You don’t have to go to the local insurance company anymore.  The internet makes it easy for you to get quotes from companies around the country.  I would start with InsureMe.com and Netquote.com.  Get as many quotes as you can, find a financially stable company, and choose the one with the lowest rate.  Good Luck. As scary as it can be to think about all this, it’s scarier to ignore it.