Life Insurance Explained in (Exactly) 250 Words

What life insurance is: a policy that pays out if you die.

When you need it: if your death would cause financial hardship to someone, like a spouse.

How it’s priced: based on life expectancy. Any factor reducing life expectancy, like heart disease, will likely mean a higher price.

Comparing prices: Even if you have medical conditions, compare life insurance quotes from several companies. Insurers are competing for your business.

When you apply: A life insurance medical exam is often required. Insurance companies typically also look at your medical records, use prescription-drug databases to see what medicines you take, pull your driving record, and access a database with your answers for previous life and health applications.

Easiest life insurance to understand: term life insurance. You choose only the policy amount and the length.

Cash value life insurance: policies that contain an account that can build up money over time. Eventually you can withdraw the money or take a loan against it. Policies with cash value include whole life, universal life and variable universal life. Term life insurance has no cash value.

Once you buy: Your rates can’t go up once you have a policy, even if you develop new health conditions.

Life insurance payout: called a death benefit. It will go to the person (or people) you designate as the beneficiary.

Note on minor children: They cannot receive life insurance money directly. If you’re buying life insurance to benefit children, you should set up a life insurance trust for them.

Amy Danise is an editor and insurance expert at NerdWallet, a personal finance website. Email: adanise@nerdwallet.com. Twitter: @AmyDanise.

This article was written by NerdWallet and was originally published by The Associated Press.

The article Life Insurance Explained in (Exactly) 250 Words originally appeared on NerdWallet.