I heard many stories about people who died with very little life insurance (some as low as $100,000 of group term insurance from their employer) leaving a spouse who earned considerably less and several, young children. What was really surprising to me was the socio-economic level of the people being described. These were lawyers, investment professionals, senior corporate executives and venture capitalists living in Short Hills, Scarsdale, the Upper East and West Sides of Manhattan and the most exclusive areas of Long Island. These were people with the means and intelligence to have thought about life insurance and who, for one reason or another, just didn’t buy, or buy enough.

This article will not convince you to buy more life insurance and it is not intended to do so. It will, however, try to make you a bit more comfortable about the various options that are available to you, some of the key questions to ask, and tips to consider, when contemplating buying a policy.

First, here is a quick review of the basics about the various types of life insurance. As you probably know, there are two basic types of life insurance: those that build cash value called permanent insurance policies and those that don’t, called term insurance policies.

Term insurance provides protection only and allows you to lock-in a premium in five-year increments from five years to 30 years. The longer the rate is guaranteed to remain level, the higher the initial premium. These policies do not necessarily terminate when the rate guarantee period ends. Rather, the premium begins to increase each year at that point. Many term policies are convertible, without any medical qualifications, to permanent insurance during the entire initial rate guarantee period. Some of the lesser expensive term policies have short conversion periods.

TIP #1: Consider term insurance with a Return of Premium Rider that returns all of the premiums you pay if held until the end of the rate guarantee period. There are additional costs associated with the Rider.

TIP #2: Consider splitting the total amount of insurance into two term policies with different rate guarantee periods.

TIP #3: When several term policies are priced about the same, choose a company with strong financial ratings and the longest period of time to convert the policy to permanent insurance. If there are still many similar choices available to you, ask your agent which company has the most competitive permanent products in the event you convert the term insurance.

The advantage of term is its simplicity and low cost. The disadvantage is that it gets very expensive as you get closer to life expectancy. Furthermore, according to a 2005 joint study sponsored by LIMRA International and the Society of Actuaries, of the 8.4 million term policies written by 22 insurance companies from 1989 to 2002, only 0.2 percent were terminated as a result of a death claim.

The most popular types of permanent insurance are Whole Life, Universal Life and Variable Life. Whole Life, long known as the most expensive, used to be considered the safest product because it offered the strongest guarantees of all the permanent products. The premium was fixed and, as long as you paid the premium on time, the cash value was guaranteed and the policy would never lapse. Each year, the insurance company, typically, paid a (non-guaranteed) dividend based on its overall investment return and operational efficiency that could be used to either lower your premium or buy additional insurance without a physical. Sometimes, the dividend grew so large that both the premium was paid and the policyowner received a dividend check.

The advantages of Whole Life insurance are the guarantees and potential dividends while the disadvantages are the cost and inflexibility of the policy design.

Universal life (also known as Flexible Premium Adjustable Life) became popular in the 1980s when interest rates were very high because cash values increases are based on current interest rates. Whereas whole life policies typically offered dividend rates at that time equaling six to seven percent, universal life "interest crediting rates" in the 1980s were as high as 14 percent. Unlike the whole life policies, these "flexible premium" policies allow the policyowner to skip a payment, pay more, or pay less than the planned premium. As long as there is at least $1 of cash value in the policy at death, the entire benefit (less prior withdrawals or loans) will be paid. However, this does affect the guarantee.

The attraction of the early versions of universal life policies came from the much lower initial premiums associated with high, projected (non-guaranteed) interest crediting rates. Although these policies offered a minimum guaranteed interest crediting rate, the insurance policy could still lapse if the cash value went to zero because the interest rates dropped or the expenses increased.

Several years ago, the insurance industry developed a universal life policy that would not lapse even when the cash value was zero. These policies offer a premium that, if paid on time, will guarantee the policy to any age, including "forever" (projected to be 120 years old). These policies are most popular today because of this guarantee and the lower premium they offer when compared to the earlier, traditional universal life policies that guaranteed the death benefit for only a few years.

How, you may ask, can a policy that is guaranteed not to lapse prior to age 120 cost less than one that is guaranteed for only a few years from issue? The answer is in the policy’s cash value. Guaranteed policies typically have a much lower cash accumulation when compared to traditional universal life policies. Even when they run out of cash value, though, the policy will remain in force.

The advantages of Universal Life are its premium flexibility and low cost. The disadvantage is that the policy’s cash value is an asset of the insurance company, subject to the claims of creditors in the case of bankruptcy. It is also subject to the claims paying ability of the insurance company.

TIP #4: If cash accumulation is not important and long term guarantees are, guaranteed universal life is an excellent choice.

TIP #5: Get a more reasonable premium by guaranteeing the policy remains in force to age 95 or age 90, and not to age 100 or age 120.

Variable Life (most commonly called Variable Universal Life) shifts the investment risk from the insurance company (with its dividends or current interest) to the policyowner. These policies, sold only by Prospectus through a Registered Representative, allow the owner to allocate the premium payments to a separate account, comprised of a long list of pre-set variable sub-accounts. These sub-accounts invest the premiums in their underlying portfolios consisting of a wide variety of asset classes. The policy’s cash value will fluctuate based on the investment performance of these portfolios that are managed by many well-known investment advisors such as Fidelity, Dreyfus, Pimco, Aim, Templeton, American Funds, Salomon Brothers, T. Rowe Price, Lord Abbett, Goldman Sachs, Van Kampen, and more.

One advantage of variable life is the opportunity for high investment returns if the sub-accounts perform well. Another advantage is the segregation of the sub-account assets (except monies invested in a fixed return sub-account) from the general account assets of the insurance company. In the event of insolvency, this segregation protects those assets from the claims of the creditors of the insurance company.

The primary disadvantage is the possibility of a loss of cash value if the investment performance in the sub-accounts is negative. These policies do not offer a guaranteed minimum return though some newer policies are offering a short, guaranteed death benefit. The guarantee, however, may only be available if premiums are invested into a specific account (most likely a blend of stocks, bonds and cash).

TIP #6: The NASD allows you to select a hypothetical rate of return on a variable life policy illustration up to and including a gross rate of 12 percent, provided that one of the returns is a zero percent gross rate. NASD members are urged to assure that the maximum rate illustrated is reasonable considering market conditions and the available investment options. No matter which hypothetical rate is initially illustrated, review a second and third illustration at a lower hypothetical rate of return using the same projected premium. This will allow you to see how your policy may perform if your targeted investment return is not met.

Life insurance policies are one of the last vehicles providing tax-deferred accumulation of cash. Whether your need is to...

· Fund a buy-sell agreement with your partners.

· Provide collateral to cover a bank loan or other debt.

· Cover a future estate tax liability.

· Equalize an estate distribution among heirs.

· Fund a charitable bequest.

· Simply to provide for loved ones who are financially dependent on your income.

...make sure there is a need for life insurance before signing an application.

TIP #7: Decide how much insurance you need before beginning a discussion about which type of policy to buy. Many people have both term and permanent insurance in their portfolio; term for the needs that will end (like college funding) and permanent for the long term needs.

TIP #8: If you have medical history that could affect your rates, apply for what you need while postponing the final decision on how much you will buy until you can accurately determine the cost.

TIP #9: Take care of your business! Take care of your life insurance!