Quiz: Do you know how Life Insurance Works?

The term of a life insurance policy can be as long as you decide, but you will receive money only if you die within the term.

The beneficiary is the person who you nominate to receive the payout from your policy should you die within the term.

Ancient Romans are the first people on record who had a life insurance system. The ancient Romans had burial clubs that would collect money from poor people to pay for their funerals.

Edmund Halley, the same person for whom the comet is named, invented the first actuarial tables. These tables calculate the risk of insuring someone based on mortality statistics.

Many factors influence how high your life insurance premium will be. Men are likely to pay more than women, and the price generally increases as you age. Health conditions, dangerous hobbies and smoking also raise premiums.

To claim a life insurance policy, the beneficiary generally has to fill out a claim form and provide an official death certificate.

Suicide is often not covered in a life insurance policy. The claim may also be denied if the beneficiary lied on the claim form or if the cause of death is not certain.

You need life insurance if you have people that are financially dependant on you and you want to ensure their financial security.

Younger, working professionals generally take out life insurance, often once they get married, but usually when they are expecting their first child. This is because life insurance is supposed to replace your financial value to your beneficiary. Teenagers are generally still dependant on someone else, and by the time people reach retirement, they are living off their savings.

Retired people usually take out life insurance policies to ease the burden of funeral and burial costs on their family.

A policy tied to your mortgage will decrease in value as you pay off the mortgage.

Although people can nominate whoever (and whatever) they want, another common beneficiary is a person's business. The policy's payout may help keep the business afloat while the deceased is replaced.

Permanent life insurance policies have a cash value component, which means that your fund invests your premium payments to increase the amount of cash in your policy account. As the name indicates, permanent polices last until you die, with no fixed term, and premiums may be fixed or flexible.

A term policy runs over a period of more than one year to up to 30 years, depending on how long you choose. Term policies usually have low rates with high coverage and fixed premiums for the term of the policy. The catch is that if you decide you want to buy a new policy when your policy runs out, your new premium will probably be a lot higher because you are now older.

To decide how much you need to spend on life insurance, you need to calculate your financial value to your family and the gap they will be left with. Beyond your salary, you need to factor in income tax and money you spend on living expenses such as food and clothes and anything else that relates to money that you earn or spend. This will be an indication of your actual financial value and the level of life insurance you need to buy.

The amount of coverage you need is called face value or death benefit. Make sure you buy a policy that you can afford. If you buy a policy with a high face value and later find that you cannot afford to pay it, you will have to cancel it and will end up with nothing.

The rule of thumb for most people is to buy a policy that helps your family get through five to seven years without you. It's important to buy a policy that you can afford but will also give you peace of mind that your family is secure.

Know the consequences of cancelling a policy. Insurance salespeople make commission off their sales, so they may leave out minor details that could cost you big. They may also make a policy sound better than it really is. Be thorough, think about what you really need and read the terms and conditions carefully before buying a policy.

Someone with a bad credit history you might want a life insurance policy that allows him to borrow money from the cash value of his account, since even the higher rates of the policy are likely to be better than what he might get from a bank. Borrowing against the value of the policy is not a good financial practice, though. It leaves your beneficiary open to financial vulnerability.