Making the decision to purchase a life insurance policy is the first of several decisions that need to be made before this important coverage is in place to protect your loved ones. One of the decisions that must be made is what type of policy to buy.

There are two basic types of life insurance: term life insurance or permanent life insurance. Term life insurance is death benefit protection for a limited period of time, much like renting an apartment. Permanent life insurance, for the most part, lasts for as long as the insured is willing to pay the premiums. Keeping to the same comparison theme, it is like buying a house rather than renting.

Term life insurance provides protection for a specified number of years. A death benefit is paid to the beneficiary if the insured dies while the policy is in force.

Level premium term plans have premiums that remain level for a specified number of years; 10, 15, 20, 25 or 30 years. After the level premium period, the premium increases each year, but never more than the guaranteed maximum stated in the policy.

The longer the term premium guarantee period, the lower the total expected outlay. Term life insurance is best when your life insurance needs are 30 years or less and the cost of permanent insurance is more than your budget will allow.

Whole life insurance is permanent life insurance designed to provide protection for a lifetime. Whole life insurance policies are designed to have a level premium fixed for life. This type of policy has a guaranteed cash surrender value that not only increases each year, but also accumulates on a tax-deferred basis.

Universal life insurance policies differ from whole life insurance policies in that they offer some flexibility to change the premium payments and death benefit. Even though premium payments are flexible, a minimum premium is required to keep the insurance protection in force. A universal life policy generally has a stated target premium. In "older" policies, this premium does not guarantee to keep the policy in force to maturity. The current generation of universal life policies has a stated "no lapse" premium that will guarantee the coverage and premium for life.

This type of policy has the opportunity to accumulate a cash surrender value, and the cash value accumulates on a tax-deferred basis. The mortality rates charged and interest rate credited by the insurance company affect a universal life insurance policy's cash value and minimum premium to keep the policy in force.