Many people say they know how important a life insurance policy is, but never do anything about it.

There are various reasons for the widespread avoidance, from not understanding how it works and the different types, to not wanting to discuss such as sad and uncomfortable subject – Death.

But smart people know that it is easy to get past these things and take out a life insurance plan for the sake of their family. Life insurance protects your loved ones should something happen to you and should be viewed as an integral part of any person’s financial portfolio.

An October 30, 2006 article by Time Byers of Fool.com, “Foolish advice on life insurance,” explains some of the ins and out of life insurance policies.

“On the surface, life insurance is morbidly simple. If you have a policy, and you die during your coverage period, then your surviving beneficiaries will be due a payment from your insurer.”

For the most part, there are four main types of life insurance that dominate as the most popular among consumers.  There are a variety of additional types that are hybrids or mixtures of the main types of insurance.

The four most popular types of insurance are: Term life insurance, variable life insurance, whole life insurance and universal life insurance.

The easiest policy to understand is term life insurance. “A very basic policy that covers your untimely death, just as auto insurance covers you in the event of an accident. There's no frills with this sort of plan, which makes it cheap. That's also why agents rarely push it and employers offer it as a perk.”

The other types of life insurance mentioned above all have a cash-value element to them, which means that you can borrow against the policy if you are ever in need of some cash, or can take money out and invest it in other avenues.

“Whole life coverage: The most basic cash-value policy, through which a portion of your premium is invested in a vehicle that offers a fixed rate of return, such as an annuity. Variable life coverage: A step-up in cash-value policies, in that the investment component allows for stocks, mutual funds, or fixed-rate choices.”

When thinking about taking out a life insurance policy, it is important to think about how much coverage you will need so you are not underinsuring yourself, or over insuring yourself.

The first thing you should ask is, “How much income would be lost without you?” If you are the sole or primary breadwinner for your family this question is extremely important.

Next, you should ask, “What bills will your loved ones have to pay?” This should be things other than the funeral; remember life insurance is for the long run.

The last question you should ask is about your investment options of the cash-value policies.

“If you're really intent on taking a close look at a cash policy, do your homework. What is your expected total return? How does your agent arrive at that total? Does he or she believe that you'll earn a completely unrealistic 15% a year on an annuity? What's the commission on the policy? What fees will you pay annually? And how would all of that compare to the 0.18% you'd pay to invest in a no-brainer index fund?”