Life insurance (also known as life assurance in the United Kingdom) is, put simply, a financial package designed to protect those who depend upon you for monetary support. A life insurance policy is a legal contract. Within it are terms and conditions of the risks assumed. Any misrepresentation by the policy holder or the insured will be grounds for nullification of the insurance.

To understand the concept of life insurance, you have to know the parties involved. In general, there are three: the insurer, the insured, and the policy holder.

The insurer is the party that provides the insurance policy. The insured is the person who benefits from the insurance. The policy holder is the person who takes out the insurance and pays for it. For instance, if you buy a policy for your spouse and take a policy on his or her life, then you are the owner, and your spouse is the insured. The policy holder and insured can sometimes be one and the same, as in when you buy a life insurance policy for yourself.

Parents take out life insurance on themselves "to protect their children."

In some cases, a fourth party is involved. The beneficiary is the person or persons who will "benefit" from the death of the insured. The beneficiary is strictly not party to the policy, but may be designated by the policy holder. The beneficiary may also be changed by the policy holder, unless the policy has a clause preventing it. Should a policy have such a clause, the beneficiary must agree to any changes made in the policy.

Insurance involves investment - and investment involves money. If an insurance agent talks about a face amount, he or she is referring to the amount paid when the policy matures, that is, when the insured dies or reaches a certain age.

Insurance costs are calculated by actuaries, who are mathematicians educated in social statistics and probabilities. Actuaries consult a mortality table, which shows average life expectancy in a population, as based on statistics, health, and lifestyle. Mortality tables are statistically based tables that show life expectancies based on three main aspects: age, gender, and tobacco use.

Before insurance is granted to a person, an insurance company gives a barrage of health questions to calculate the person's risks. Such questions will include inquiries on a person's lifestyle, such as tobacco use, frequency of alcohol consumption, and sports that the person concerned is engaged in; and if the person's family has had any cases of severe illness, such as heart problems, liver problems, or cancer. The evaluation and investigation of risk is called underwriting, and is done by underwriters.

Proceeds from a policy are granted to beneficiaries upon the insured's death. They may be paid in two ways: with a lump sum, or a single payment; or with recurring payments, which will be given to the beneficiaries in parts over a specified time period.

There are two main classes of life insurance: permanent and term.

Permanent life insurance is life insurance that is valid until the policy matures, and will be nullified only if the policy holder does not pay the premium when he or she has to. Permanent life insurance also accrues, or accumulates a cash value, and this cash can be accessed by withdrawal, borrowed in the form of a loan, or recovered in part should the person concerned surrender the policy.

Term life insurance, on the other hand, provides life insurance coverage only for a certain amount of time, and for a specified premium. Unlike permanent life insurance, term life insurance does not accrue cash value. The premium also buys financial protection for the beneficiary in the event that the insured dies, but it will provide for nothing else.

Another type of life insurances includes accidental death, a limited life insurance package meant to provide coverage to an insured's dependents should the insured suffer fatally from an accident. This insurance does not cover death due to health problems or suicide, but it is frequently purchased, as it is much less expensive than other life insurance types.

Whatever the type of insurance you may prefer, consult with a reputable insurance agent, or with someone close to you who has purchased one or more insurance packages. Life insurance, like your life, is a precious thing, and it involves investment and a lot of know-how.

Next page: Who Needs Life Insurance?

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