Life insurance is insurance that provides for payment of a predetermined amount of money to your beneficiary when you die. There are essentially two types of life insurance: term and cash value. For most people, term insurance is the better, more cost-effective insurance to buy, but for others, cash-value coverage makes some sense. Read on.

• Term insurance provides a death benefit, period. You buy it for a specific period—the term—which is anywhere from a single year to 30 years. You pay premiums every year to keep the policy in place. If you die before the term is up, the policy pays out. If you don't, it doesn't; it expires, and that's the end of it. Buying term insurance is the only way most people are able to buy as much insurance as they need at a price they can afford. 
  
• Cash-value insurance—variations of which are called whole life, universal life, variable life and many other things—combines insurance (a death benefit) with an investment account. The premiums are much higher than those for term insurance, but the policy builds value over time. It does not expire. If you decide not to continue paying for the policy, you may lose the death benefit, but there will be some cash for you to pull out. In a pinch, you can borrow against the policy. When you die, it pays your beneficiaries the predetermined death benefit plus any cash value your account has accrued. 
  

Who needs it?
Anyone who has others depending on her or his income or services for support needs life insurance. If you stay home and take care of your children or an elderly parent, the services you provide have value, and you should think about buying a life insurance policy.

How much will it cost?
Premiums vary widely, but in general they go up with the amount of cash-value coverage you buy and down with the amount of term insurance you buy.

Where should I buy it?
Shop for term coverage on the Internet; search engines have made the market very efficient. Purchase cash-value coverage through an agent. Be sure you're talking to an agent who is recommended by a friend or colleague you trust. Also, be sure that the insurance carrier you're purchasing coverage from is rated A or better by A. M. Best (go to www.ambest.com to check company ratings). The higher the rating, the better the financial health of the insurer is.

How much life insurance will I need?
Essentially, you need enough to provide for your dependents for as long as they'll remain in the family nest, plus the cost of any large expenses you want to cover—such as paying off the mortgage or paying for college. A lot of insurance agents (remember, these are people who sell insurance for a living and make big commissions on your premiums) use rules of thumb like eight times your income or 10 times your income. I think rules of thumb work for very few people.

Use this worksheet to see how much you really need.