Everybody knows what life insurance is: if you pass away while a policy is in force, your beneficiaries get a tax-free payment. Like disability insurance, life insurance can help replace lost income if a breadwinner dies. It can prevent the addition of insult to injury, so your beneficiaries' credit doesn't suffer while they are suffering emotionally from your loss.

Who Needs Life Insurance?

If you have somebody depending on you, you probably need life insurance. If you're young and single, you can get away with only insuring your own income in case you live through hard times. However, once you add other people to the mix, you need to think of them. In fact, you might consider life insurance even before you take on the responsibility of providing for others; the older you get, the more expensive insurance gets, and you might become uninsurable if you get really sick.

Thirty-One Flavors

There are many different types of life insurance available. Really, you only need to understand that there are term policies and permanent policies. Term policies remain in force for a specified number of years (or a specified term), and then they are gone. A permanent policy might last as long as you do, and it usually has a build-up of cash value over the years.

Which should you use? It depends on a variety of factors. For protecting your credit, term insurance may be adequate. Term insurance typically offers the largest death benefit, or payout, for the lowest monthly premium payment. If you only want to protect the family in case of an unexpected death, term insurance should do the trick.

Term Insurance

For example, assume that a young couple moves into a new home and has two children. They buy thirty-year term insurance on each of them. If one should die, the insurance company will pay the surviving spouse a large sum of money. That spouse can then pay off the mortgage and provide child care and higher education for the children. If nobody dies after thirty years, the policy goes away. However, they may not need the large death benefit at this time — the children are now self-sufficient and the surviving spouse earns a healthy income. Furthermore, the home mortgage is likely paid off, or the surviving spouse can move to a smaller, less-expensive home and eliminate any house payments.

Permanent Insurance

Permanent policies do more than just protect your dependents for a given number of years. First, they can extend the amount of time that coverage stays in place. If you want to be sure that somebody gets a death benefit payment, a permanent policy might be appropriate. For example, you might want to ensure that your spouse never has to enter the workforce, even if you die when you are sixty-five. A permanent policy can be in place for an entire lifetime, so it is reasonable to expect that it could pay a death benefit when you and your spouse are in your fifties, sixties, seventies, or older. Depending on your household, permanent insurance can protect your credit or perform other tasks.

Life Insurance at Work

Large employers often offer group term life insurance as an employee benefit. Make sure you understand what you have. Standard group life policies are quite modest. For example, your coverage may only be for $10,000 or one year's salary. While this money will help, it is not enough to protect your loved ones. See if you can sign up for more, even though you will have to pay for the extra coverage.

The small death benefit is only one reason to look outside your employer for coverage. Another reason to shop individual policies is to have control over your life insurance. Consider what happens if you leave your job; you will most likely lose your coverage. If you become self-employed, you won't have another employer to pay for your insurance. At that time, you might be older, when insurance is more expensive, or uninsurable because of recent health issues. For these reasons, you should investigate owning your own life insurance.