Simply put, life insurance is money an insurance company pays to your named beneficiary when you die. Your beneficiary can use some of this money to pay the expenses related to your death, and can invest the rest to generate income that will help replace your salary. You can name anyone you wish as your beneficiary.

Yes, if other people are dependent on you and will suffer financially if you die. For example, life insurance is a necessity for anybody who has dependent children. You don't need it if you have no financial dependents.

Term life is the simplest and least expensive type of policy. It's pure insurance with no cash value account. A term life policy has only one function: to pay a specific lump sum to whoever you've designated, upon a specific event - - your death. The death benefit and the policy limit are the same - - a $200,000 policy pays a $200,000 death benefit. The policy protects your family by providing money they can invest to replace your salary, as well as to cover immediate expenses incurred by your death.

Other types of life insurance provide both a death benefit and a cash value account. Their premiums are larger than term life premiums, because they fund the savings account in addition to buying insurance. These policies are often referred to as cash value policies. They include:

• Whole Life
• Variable Life
• Universal Life
• Universal Variable Life

All life insurance policies provide a death benefit to designated beneficiaries at the death of the insured. Some policies, such as whole life, universal life, and variable life insurance, also have a cash value account. On top of a minimum guaranteed death benefit, these policies create a cash value account - - cash that builds up over time and can be used by the policyholder for non-insurance purposes during his or her lifetime.

For example, a policyholder can borrow against the policy's built up cash value, subject to certain conditions in the policy. A policyholder has the option to "cash-out" the policy - - i.e., terminate the contract, and receive its cash value, minus any surrender charge or outstanding loans. Of course, if you terminate your policy before it's fully paid up, you will no longer be insured and may later face the prospect of being uninsurable.

All policies with a cash value account cost substantially more than term policies that offer only a death benefit, because the premium payment must be large enough to fund the desired accounts as well as to cover the cost of pure insurance.

Term life does not contain a cash value account because the proceeds of a term policy are only paid upon the death of the insured and it only pays a stated amount of funds that are supposed to cover the economic loss to the beneficiary.

1. Whole Life Insurance

Whole life insurance provides permanent protection for your dependents while building a cash value account. With this type of insurance, the insurance company manages your policy's various accounts.

What it does:

• It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax-deferred cash accumulation.
• It provides a fixed premium which can't increase during your lifetime as long as you continue to pay the planned amount.
• It allows the insurance company to exclusively manage the cash value account in your policy.
• It provides you the option to receive dividends from your policy or apply them to reduce your payments.
• It offers you the right to withdraw from the policy during your lifetime.

What it doesn't do:

• It doesn't offer the account flexibility to invest in separate accounts such as money market, stock, and bond funds.
• It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts.
• It doesn't offer premium flexibility.
• It doesn't offer face amount flexibility.

2. Universal Life Insurance

Universal life insurance provides permanent protection for your dependents and is more flexible than whole or variable life.

What it does:

• It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax deferred accumulation.
• It allows you to earn market rates of interest on your cash value account.
• If offers the right to borrow or withdraw from the policy during your lifetime.
• It allows you premium flexibility.
• It offers face amount flexibility.

What it doesn't do:

• It doesn't offer you the account flexibility to invest in separate accounts such as money market, stock, and bond funds.
• It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts.