Life insurance is considered a critical component of a personal financial plan for a couple of reasons. First, life insurance helps replace income lost by the death of a wage earner. Second, it can help your dependents pay outstanding bills and taxes when you die.

Before buying life insurance, you should assemble personal financial information and review your family's needs. Some factors to consider when determining how much insurance to buy include:

• Ongoing financial needs, such as monthly expenses, college tuition or retirement.

• Funds for the period of adjustment after death that will help family members move or take the time needed to find a job.

• Any immediate needs at the time of death, such as illness expenses, burial costs and estate taxes.

Also called whole life insurance, permanent life insurance provides lifelong protection as long as you pay the necessary premiums. Permanent policies are designed for persons who plan to keep them for a long time.

Most permanent policies accumulate cash value. It offers tax deferred growth on the cash value during life and generally, a tax-free death benefit. This feature provides you with some options.

• You can cancel or "surrender" the policy—in total or in part—and receive the cash value as a lump sum of money. When surrendering a policy, the surrender value may be less than the cash value due to surrender charges or other fees.

• If you are unable to pay premiums for a limited period of time, you may choose to use the cash value to continue your policy in force. However, the death benefit and cash value will be affected.

• You may borrow from your policy's cash value. However, taking out a policy loan can have a significant impact on your policy's performance and future dividends, and should you die before the loan is paid off, any outstanding balance and interest will be deducted from the death benefit.

Talk with your tax consultant about possible tax implications before making any decisions on the use of your policy.

Keep in mind that cash value is different from the policy's face value. Cash value is the amount available when you surrender a policy before its maturity. Face value is the amount paid at death or at policy maturity.

Traditionally, permanent life policies involve annual premiums that do not increase as you grow older and must be paid as long as you own the policy. However, some policies now have flexible premiums and may limit the number of required premiums to 20, 10 or even fewer—while still providing coverage, cash value accumulation and loan privileges throughout your lifetime.

Term insurance is the simplest form of life insurance. It provides protection for a specific amount of time and pays a death benefit only if you die during the term. Some term policies can be renewed as you reach the end of a specific period, as specified by the policy. Some policies may require you to provide proof of insurability at the time of renewal in order to receive the lowest possible rates. Premium rates generally increase at each renewal date.