A little about life insurance.

Where to start?
Before getting into the major questions of how much life insurance you need or whether you want term or permanent insurance, do some homework on the companies you are looking into providing your policy.

You need to know how long the company has been in business, the size of it and its ratings. You also want to ask the agent, 'What are your credentials for being a life insurance professional?'

Research the financial strength of life insurance companies by checking out their fiscal ratings through organizations such as A.M. Best Co., Standard and Poor's and Weiss Ratings. When it comes to the life insurance agent, look for designations such as Chartered Life Underwriter, Certified Financial Planner and Chartered Financial Consultant.

Consumers will also want to know if their agent sells insurance from one particular insurance company or multiple firms.

How much life insurance do I need?
How much life insurance you'll need involves two major factors: how much it will take to pay your debts off, including the mortgage, and how much your dependents will need to maintain the same lifestyle after you're gone. Though all companies factor those two variables in, insurance providers frequently use different formulas for determining your specific insurance need.

Professionals advise that consumers need to ask how their adviser came up with the appropriate amount of insurance. Was it a ballpark figure? Was it based on an analysis?

Understanding how your need is determined is crucial, especially for families with unusual debts, such as high medical bills, that may not be considered in a rudimentary-needs formula. Once policy shoppers are sure their insurance agent is taking all of their current and future fiscal needs into consideration, they can purchase a policy that fits their family.

You'll want to ask about the basics of the policy, including how long the policy will last, what your premiums will be, what the policy's rate of return is and how the death benefit works. If you're purchasing permanent insurance, you should also ask about what kinds of benefits the policy provides while you're living.

What do I need to look for in a policy?
Look for four things: control, liquidity, use and equity.

Control means the policyholder is clear on who owns the policy, who's funding it, who gets to decide the beneficiaries and whether the policy stays open or closed.

Liquidity means the policyholder is clear on how much money he or she can take out of the policy and how fast.

As for use and equity, policyholders should thoroughly understand what money taken from their account can be used for and what the rules are on borrowing against it if you need to take a policy loan.

How does my health play into my policy?
Unless you're buying a guaranteed-issue policy or purchasing life insurance through your employer, you'll probably have to endure a medical evaluation. The problem is that over the duration of your policy, your health could change for better or worse.

If you don't get the highest health classification when you apply for the policy, you need to ask if there is the ability to improve on that rating if your health increases.

People who have had health risks such as a heart attack, DUI or smoking habit in the past can have between 10 percent and 20 percent knocked off of their life insurance premium if they undergo new medical underwriting after a certain period of time. Policyholders, especially those with term insurance, will also want to know what happens if their health decreases or if they become uninsurable.

What if you become disabled?
Even if you don't purchase a disability rider or a separate disability insurance policy, some life insurance policies provide some benefits for policyholders who become disabled.

Be sure you know that insurance companies have different definitions for "disabled." While some providers define it as an inability to perform your specific occupation, others define it as an inability to perform any occupation at all. Being clear on what defines disability and whether your life insurance waives premiums in the event of catastrophe can help you find the right policy and determine your need for additional riders.

What about inflation??
If we're talking about a death benefit that's anywhere from 20 to 80 years away, you need to talk about having that death benefit increased over time.

A $500,000 death benefit may seem enormous today, but 30 years down the road, it will only be worth approximately $200,500 after adjusting for inflation. With inflation increasing approximately 3 percent each year, time alone can severely erode your life insurance policy even if you never miss a payment. While some policies automatically adjust to keep pace with inflation, some companies sell that feature as an additional rider. Before signing onto a policy, shoppers should ask their life insurance agent if the policy automatically factors in inflation and allows them to buy more insurance later on if necessary.

What if I can't pay my premium??
If you run into financial trouble, knowing your options is invaluable. Most term policyholders who can't pay their premiums typically have a 60- to 90-day grace period to come up with the money, but permanent policyholders have more options.

Permanent policyholders can take an 'automatic premium loan' and borrow against the cash value of the policy to pay the premiums. If you're going to borrow against the cash value, you'll want to ask what the loan rate is, and those are usually anywhere between 5 and 8 percent.

The added bonus of borrowing against your policy is you don't have to pay it back, but you should understand how borrowing against a cash value policy could affect your future returns and death benefit.

Information source: bankrate.com