Shortly after my wife and I had our first child, my financial advisor suggested I look into purchasing two types of life insurance policies.  The first was a term insurance policy, and the second was a whole life insurance policy.

I pay an annual premium for my term policy on a yearly basis and my advisor calculated the benefit payout based upon what our living expenses were, and if either one of us passed away, how much would the other need to supplement our annual income to cover our costs.  The life insurance policy premium would be put into an interest-bearing account, so the idea would be that the annual interest would cover our costs.

Because we were relatively young and healthy, we were able to lock in an annual premium of $900 ($800 for my wife) for 20 years.  If one of us passed away, the other would get $2 million.  I got this through AIG, then switched to ING's Reliastar 5 years later due to the fact that they could further extend my 20 year term with a lower annual premium.

It's definitely a sad thing to see that money go away each year, but it is a good security blanket for the family, and relatively inexpensive.  I did have to have an examiner come to my office, take my blood and urine samples, and ask lots of questions before they approved us - they are definitely very strict about this.

Whole insurance is an entirely different beast which I had to have explained to me a few times before I bought into it.  The basis idea here is to pay a monthly premium for life insurance, which pays out much less than term insurance, but you're overpaying the premium which acts as principal for a retirement fund, which pays out dividends.  There are two main advantages of this policy a) It locks in a premium for you for the rest of your life, so that you don't have to worry about paying ridiculous premiums when you're 70 or so and b) it acts as a conservative investment tool which you can access later on in life.

For my wife and I combined, we pay $750 a month as our premium.  The insurance payout is $435k for one of us, so much less than our term, but we're essentially combining a 401k and long-term insurance policy together.  The really important thing to know; however, is that you have to be able to keep up with the premiums - if you don't, the penalties are bad and you end up losing money.  You have to really think of this as something to "set and forget".

In recent years, this investment looks to be a good one; however, during boom years, investors will tell you it's lame and way too conservative.  I'm a mid-risk taker so I like the idea of diversifying the risk of my portfolio - and this being one of them.  On another note - this was the right time to set up a will - get it all done at once and you don't have to deal with the stress of planning for your death for a while!