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Life Insurance is one of those things that most people know they need, but few understand what type of coverage they should have. In this article I will attempt to break it down to its simplest forms to give you an idea of what is available and what some of these confusing terms mean. I always liked the expression, "It is not what it "is," but rather what it "does" that is important." Last year, thousands of people bought ¼-inch drills from Wal-Mart - the crazy part? None of them wanted a ¼-inch drill - they wanted a ¼-inch hole!

First you need to decide what your "needs" (or "wants") are - then you can begin to look for a solution to meet those needs/wants.

Life insurance can be a tool to provide for everything from paying final expenses, retiring a mortgage, income replacement, to a tax sheltered investment - and everything in-between. Life Insurance can provide individuals with piece of mind, whether it be protecting their family, estate planning or solving a tax problem. There are many uses for business owners whether it be protecting against the loss of a key person to funding buy-sell provisions of shareholder agreements. Often insurance is the least costly solution to a problem.

At a basic level, there are two main types of insurance - permanent or temporary. Within these broad categories, there are a myriad of hybrid, custom and combinations of each. Below is a brief explanation of temporary (or "term") insurance and the two main types of permanent insurance.

1. Temporary

* Term Life Insurance - Is the most basic, and generally the least expensive, form of insurance (at least in the short term) that lasts for a specific period or time period (Term), whether it is one, five, or ten years, the length of the mortgage, or until the insured's 21st birthday. Term life insurance has a definite ending date, and the face amount is only paid if the insured dies while the policy is in force. Although normally there will be renewal options at the end of the specified term, the premiums will increase significantly at renewal as new medical underwriting is not required.

2. Permanent

* Whole (or Level Premium) Life Insurance - This is life insurance that will last as long as the insured person is alive, provided the premiums are paid on time. In addition, these policies usually keep the same premium for the life of the policy. Because of the length of time these policies can stay in effect, the insurance company collects more money than they need in the early years of the policy to cover later years. This extra money accumulates as Cash Values and even earns a minimal amount of interest. The insured can borrow against it or receive it if he or she cancels the policy.

* Universal Life Insurance - This is actually just a more sophisticated version of the Whole Life Policy. In these policies, the Cash Values are put into various investments that will often earn more in interest or investment returns. Excess accumulated Cash Values can be used to reduce future premiums or increase the Face Amount. This type of policy allows for flexibility in premium payments as well as in death benefit amounts. Think of this policy as an investment account with a life insurance policy attached.

Other types of insurance and common terms worth mentioning are:

* Disability Insurance - for the majority of people, their most valuable asset is their ability to earn an income. Disability Insurance is designed to mitigate the risk of losing ones ability to earn a living.

* Long-Term Care Insurance - helps provide for the cost of long-term care beyond a predetermined period. Long-term care insurance covers care that is generally not covered by health insurance or Medicare.

* Critical illness Insurance - temporary insurance that provides a lump sum payout should you develop a critical illness such as Cancer, stroke, or heart disease.

* Paid-up Insurance - a feature of some types of permanent insurance where premiums are only paid for a specified amount of time (10-15-20 years, etc), after which the coverage remains in place for life, with no additional payments required.

* Group Life Insurance - Most employers who offer employee benefits will provide a basic amount of life insurance to all employees. This coverage is really a form of term insurance it only last while you are an employee or member of the association. It is almost always guarantee issue, without requiring any medical information. While insurance can be used to provide protection for specific needs, in certain situations it can also be used as a tax-advantaged way to create wealth by investing within an insurance policy. High net worth individuals or business owners looking for a way to get cash out of their company tax efficiently should explore options with their financial advisor to determine if they could benefit from one of these strategies.

While I have described the basics of life insurance, there are many different variables, options and hybrids of products designed for every particular need with many more new products being created each year. Take the time to inform yourself of your options and consult a professional before signing on the dotted line to ensure you select the most appropriate coverage for your needs.