There are at least three ways to determine how much life insurance you should have. The first way is easy: how much will the insurance company give you? The idea here is that you are irreplaceable and so you should get as much as you can. The second way is to calculate how much money would be needed to replace your annual income. For example, if you want to replace $100,000 per year and your spouse could get 3% interest at the bank, she would have to deposit $3,000,000 to get $100,000 per year. The third method is to pay off all debts, including the mortgage, and to provide specific amounts of money for items like college, etc.

Once you know how much insurance you should have, the next step is to choose the type of insurance.  You’ve probably wondered for years what “Universal Life” means, or “Variable Life,” or “Whole Life.” Just read below for your answer!

Types of Life Insurance

Term Life Insurance
Term Life is a kind of insurance that lasts for a specific number of years. For example, “Ten Year Term” usually guarantees that the premium will not change for ten years. When the ten years are up the premium will go up substantially, leaving you with three choices: 1) cancel the insurance (it served its purpose), 2) apply for a new Term life insurance policy, or 3) convert your Term policy to a Permanent policy if your insurance company permits it.

In addition to Ten Year Term, there is Fifteen Year Term, Twenty Year Term, and even Thirty Year Term.

Universal Life Insurance
These days, Universal Life is usually marketed to provide the lowest guaranteed premium that will last to age one hundred, or even longer. This type of Universal Life is very similar to Term Insurance in that it builds little if any cash value, emphasizing instead a level premium that will last for the rest of your life. Think of it as “lifetime term insurance.”

Whole Life Insurance
Whole Life is insurance that provides protection for the “whole” life. The key elements to Whole Life are a guaranteed premium, a guaranteed death benefit, and cash value. If the policy has been designed appropriately, the cash value grows tax-deferred and can be tapped into for a variety of reasons including emergency funds, college education, or to supplement retirement income.

Variable Life Insurance
Variable Life is similar to Whole Life and Universal Life except that your “cash value” is invested in the stock market rather than invested by the insurance company. The idea is that over time the stock market could produce higher returns than the insurance company, and that these returns are tax-deferred. As usual, with higher potential return comes higher risk. To address the risk problem with Variable Life, in recent years some companies have marketed a new product called Equity Indexed Life. This product offers some of the potential gains that Variable Life offers, but without the same degree of risk.