Life insurance is a contract between a policy owner and an insurer, whereby the insurer pays a sum in the case of death by the owner. In return, a premium is paid by the policy owner, generally on a yearly basis. The rates for premiums are dependent upon health, age, gender, high-risk activities, and other factors. This guide will help you learn how to determine if you need life insurance.

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

• Life insurance is payment of a sum in the event of an individual's death.

• Life insurance is a for-profit activity in the U.S.

• High-risk activities like smoking and driving a motorcycle will increase your life insurance premium.

• Fear sells life insurance policies, do your research and be logical about what you buy.

• There are many types of life insurance policies: whole, universal, limited-pay, accidental death, and more.

• Life insurance rates increase as a person gets older, simply because the person's chance of dying increases.

• Actuaries who work in life insurance determine mortality risks in an attempt to minimize financial losses and maximize profits.

• Life insurance can provide a safety net when there is none.

• Major death events, such as the 1918 flu epidemic, would likely cause bankruptcy to most life insurers.

Determining if you need life insurance depends upon your life situation, your dependents, and your economic importance. Life insurance can provide a safety net when tragedy strikes, and although it can never replace a person, it can provide some financial security for the benefactors. There are three major areas in determining if you need life insurance: you're in a high risk group, there are significant negative financial consequences if you die, and for peace of mind to you and your benefactors while you're alive.

A person that is in a high-risk category has a greater chance of dying than the average case. Those at a higher risk for death are those with chronic disease, particularly cardiovascular disease and cancer.http://www.cdc.gov/NCCDPHP/burdenbook2004/Section01/tables.htm Other high risk activities include: smoking, heavy alcohol use, being significantly overweight (obesity), having a dangerous occupation, extreme sports, and more. You will be charged a higher premium when you disclose high-risk activities to your insurance provider.

High financial consequences occur when a person has a keystone position in an economic circumstance. This could be the head of household or single worker in a family with several dependents, such as children. If the single worker dies, it could mean financial ruin and disaster for the family members. A life insurance policy can provide a safety net if none exists.

High financial consequences would also affect a person in a prominent position, such as a CEO of a major corporation, or a top-tier actor in a multi-million dollar hollywood movie. Businesses will often take out insurance policies for important people, which if were to perish, would mean a severe negative economic impact to the enterprise.

Fear is a powerful motivator. In a landmark experiment done by Amos Tversky and Daniel Kahneman (Nobel Prize laureate), known as the Prospect Theory, found that people were much more willing to take risks to avoid losses rather than make gains.http://www.sjsu.edu/faculty/watkins/prospect.htm The insurance industry has successfully utilized this aspect of human psychology, motivating prospects with sales lines like “What would happen to your family if you died?”. It's a real question, and one that you need to live with.

For some people, having peace of mind requires minimizing potential losses as much as possible. When your quality of life would degrade significantly from psychological worry, it's a good reason to purchase life insurance. It may also improve the peace of mind of your benefactors.

When determining if you need life insurance, you should know the facts. Here's a listing of information about death rates in the U.S. which will give you some perspective on your chances of dying.

Overall Chance of Dying in a Given Year in the U.S. from the CDC in 2004http://www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_09.pdf

Notes: These numbers reflect statistics from the whole population, so if you're considered low risk (non-smoker, not obese, no chronic diseases, etc) your chance of dying would be significantly lower.

• 15-24 Years: 1 in 1,279
• 25-34 Years: 1 in 1,000
• 35-44 Years: 1 in 549
• 45-54 Years: 1 in 241
• 55-64 Years: 1 in 112
• 65-74 Years: 1 in 48
• 75-84 Years: 1 in 20
• 85-94 Years: 1 in 8