The facts of life insurance.

Life insurance is one of the financial basics that everybody needs--right? Well, as the song goes, "It Ain't Necessarily So."

Granted, most people are covered by some type of life insurance, whether through a group plan at work, bundled as a part of veteran's benefits or as an individual policy purchased on their own.

Yet a single person with no dependents can probably get by without life insurance. And a married couple without children who are covered under a company plan usually won't need much of an extra cushion. However, parents facing tuition fees, a mortgage, medical costs, and car and credit card payments might be tempted to load up on as much insurance as they can affort. But before rushing out to buy coverage that equals five times your salary (a misleading figure that many people quote), be sure to assess your own specific needs with a life insurance conselor or, better yet, a free-only financial planner.

If you're perplexed by the complex world of insurance, you are not alone. Even financial advisers agree that this is one of the most misunderstood areas of the financial planning process. With nettlesome policy provisions and widely varying premiums, most folks have a hard time figuring out exactly what they've got. Are you underinsured? Overinsured?

Of course, no single formula can be applied to an individual or family's insurance needs. But there are some major issues that everyone should understand.

THE RIGHT POLICY FOR YOU

Today, consumers choose between two basic types of life insurance coverage: term and cash value. Term insurance is a contract for a finite time period (say from one to five years) which guarantees to pay a specific death benefit, usually in increments of $100,000. Premiums for this type of insurance run from $100 to $1,000 or more per month, depending on the policyholder's age and health. If the insured outlives the policy, the beneficiary gets nothing when the policy ends. Coverage stops at the end of the term unless you select a renewal policy.

Many people use term insurance to fill a gaps of coverage; for example, if they're between jobs. Others like it because it allows families to decrease their coverage as needed; as children leave home, for instance. On the downside, if you wish to continue coverage after the term lapses, you must renew. Depending on such factors as a subscriber's age and health, premiums could easily double within six or eight years. Moreover, insurers are under no obligation to renew your policy at all, and are not likely to do so after you reach the age of 70.

On the other hand, cash value insurance stays in effect for as long as you choose--usually until death. For the long-term benefits if offers (including the option of borrowing against the policy), premiums for this type can run about three times as much as term. Payments are pegged according to one's age and the policy's face value; unlike term insurance, they are apt to stay the same over your lifetime.

An important feature of cash value insurance is that the policy has a savings component. So while a portion of the premium is applied to you death benefit, the larger part gets stashed into a mix of securities which earns a fixed or variable rate of return. This "cash value" grows tax-deferred, and is yours to draw upon for loans. If you cancel the policy, most of these savings are yours for the keeping.

Beneficiaries of cash value insurance receive only the face value of the policy and not the accumulated cash value. So if you have a $200,000 policy with an accumulated cash value of $20,000, your beneficiary would receive only $200,000 at the time of your death and not $220,000.

This is one reason why many folks take advantage of the equity value of their policies well before they die, using the money to buy a new car, fix up their home or fund college costs. (Policyholders usually must wait five years before exercising the loan privilege.) A policy loan is a viable way to get one's hands on some cash if unforeseen needs arise. But this is wise only if there's adequate coverage to begin with, says Vernon J. Brown, certified financial planner and principal of V. Brown & Co. Inc., White Plains, N.Y. "If you need a $5,000 loan and have the means to pay it back in a short period of time, that would be one reason to borrow against your life insurance," says Brown. Otherwise, the penalties are stiff. If the policyholder fails to repay the money, the insurer will deduct it from the principle. This affects heirs, who will walk away with reduced death benefits.

In short, no one should buy insurance strictly as an investment or savings vehicle, says Cheryl Broussard, principal of Broussard/Douglas Inc., an Oakland, Calif.-based assets and mutual fund advisory firm. "Insurance is primarily financial protection for your dependents when you die."

CASH VALUE INSURANCE

Cash value insurance comes in three forms: whole, universal and variable life. The most common cash value product is whole life insurance, which invests your cash reserves in a portfolio of stocks and bonds and offers a fixed rate of return, recently about 4.5%.

Universal life insurance is similar to whole life, but is much more flexible. You can adjust the terms at any time, increasing or decreasing both premiums and coverage. Most significantly, iniversal life combines the low-cost protection of term insurance with an interest-bearing money market account or mutual fund. The downside is that expense, management and mortality charges are factored into the premium. Interest is credited at rates that may change from time to time.

Variable life insurance is certainly not new, but its popularity is gaining. Under this plan, death benefits and cash values fluctuate according to the investment experience of the company managing the account. These policies must be registered with the Securities and Exchange Commission (SEC) and are sold by brokers. Typically, these policies let you choose between various kinds of bond and/or stock funds.

Variable life insurance lets you pay either scheduled or flexible premiums. The former are fixed in timing and dollar amount, but you can determine the frequency and the size of premium payments with a flexible policy.

Though each of these policies is attractive for many reasons, as with all insurance products, caveat emptor. "Many companies fail to provide complete information about the cost of cash value life insurance," explains Robert M. Nelson, chairman of the National Association of Life Underwriters' Sales Illustrations Task Force. He charges that many agents fail to break down administrative expenses, including sales commissions--all of which are factored into the premium. Dividends and interest rates are usually not guaranteed--the illustrations that insurance agents show are merely projections. So remember, consult with a professional before plunging into any policy. After all, your emphasis should be on passing wealth from one generation to another--not making easy money.