By Vicky Anscombe on 02 October 2014

If you think that you can forego life insurance, think again.

It's true that it has a few other functions - for instance, protecting key employees in businesses and paying potential estate taxes. However, most people will buy it to protect their loved ones in case something happens to them.

It's a morbid thought, but if something happens to you, your family could face huge economic consequences. Bills will need to be paid, the mortgage won't go away, and any outstanding debts will need to be sorted. Unless you're some kind of royalty or you're independently wealthy, it'll be a tight squeeze for the people left behind.

Unsure of where to begin? Here's a concise explanation...

Life insurance can pay your dependants a lump sum or regular payments if you die.

Some policies run for a fixed period of time, such as 5 or 10 years. They will only pay out if you die during the policy term. However, a whole-of-life policy will pay out to your family whenever you die - it doesn't matter when this happens, but you do have to keep up with regular payments.

It sounds obvious, but life insurance only covers death - if you become ill or suffer with a disability, you won’t be covered. Lots of policies won't pay out if you die due to drink or drug-related abuse, and if you play dangerous sports, you may have to pay extra.

And if you have a serious health problem when you take out the policy, your insurance may exclude any cause of death related to that illness. The good news is you can buy policies which include other types of cover such as total and permanent disability and critical illness cover.

If you were planning on relying on the government to protect you and your family, don't - the money they would get from the state is much lower than you’d probably expect.

Even if your partner earns enough to provide for your family, it's worth bearing in mind that funeral expenses can be costly - and an appropriate policy can take care of this.

'Death in service' is an employee package that pays out if you die while working for your employer. It's worth checking that the total sum is enough to cover all your family's financial needs - and if you're not happy, you can always make up the defecit with a life insurance policy. Please note that if you stop working for that employer or you have to leave because you're ill, you may lose your death in service benefits - and may not be able to take out life insurance at that point.

For the peace of mind it brings, life insurance is excellent value for money. A Which? survey published last year revealed that a non-smoker in their 50s taking out £100,000 of life insurance for ten years could pay less than £1 a day. If you're relatively young and still healthy, it's a very good idea, as for just a few pence a day you can look after the people you love if something awful happens.

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