Insurance is designed for all the "what-ifs" in life, providing an invaluable tool you can use to financially protect your family.

You may already have car and health insurance, but life insurance is one of the most important insurance policies you can carry. What is life insurance? Life insurance is an agreement between you and an insurer where you pay monthly premiums so your loved ones will receive a death benefit, or cash payout, upon your death.

For single parents, parents with young children or anyone else with family members who financially depend on them, life insurance can provide resources for those left behind. It can help ensure daily living expenses like food, clothing and shelter are covered for a period of time, even after a parent or spouse dies. Certain types of life policies, known as cash value life insurance, can also be valuable for retirees.

If you don't yet have life insurance or are unsure if you need it, this primer can help you make an informed decision about whether to get a policy and, if so, how much coverage you need.

What Is Life Insurance?

There are two basic forms of life insurance: term life insurance and whole life insurance.

Term life insurance provides coverage for a set amount of time — typically anywhere from a 10-year to 30-year term. These policies ask you to pay a monthly life insurance premium for as long as you hold the policy. If you pass away before the term expires, your named beneficiaries (typically a spouse, children or other close relatives) will receive a cash payout based on the coverage amount you were approved for when you first signed up for the policy.

Whole life insurance is permanent. Although it's typically more expensive than a term policy, this kind of insurance never expires. Whole life policies also come with another advantage over term life insurance: a cash value component. Life insurance policies that include cash value allow policyholders to withdraw cash from their policy while they are still alive. That's because part of the monthly premium you pay is invested and accrues interest: With cash value life insurance, you can withdraw this interest along with the portion of your premiums that your insurer set aside in a cash value account. You also can take out a loan against the policy's cash value — however, your insurer will charge you interest for borrowing from your policy.

You can withdraw or borrow from your policy's cash value without creating a taxable event, meaning that you won't typically have to pay income taxes on this money. However, if you withdraw more than you've contributed in premiums, your gains may be subject to taxes. It's also important to keep in mind that withdrawing cash from a permanent life insurance policy could reduce the death benefit your loved ones receive. Most insurers guarantee a minimum rate of return for the cash value component of a permanent life policy, so it's possible that even if you do make withdrawals, there could be enough money left to help your family cover certain expenses.

The rules are a bit different for beneficiaries. Whether you have term or whole life insurance, the death benefit paid out to your loved ones isn't taxable, and they don't have to report it as income on a tax return.

How Much Life Insurance Do I Need?

To determine how much life insurance you need, start by entering your information into a life insurance calculator. You can easily find these tools online. Advice from experts vary, but the general consensus is that a life insurance policy should be the equivalent of at least 10 times your current salary. If you make $75,000 a year, then you may opt for at least a $750,000 policy.

Although this quick formula can give you a ballpark idea of your coverage needs, take your unique needs into account as well. Consider all of your current financial obligations, including your monthly living expenses, debts and future financial obligations like college tuition and health care. Once you have more insight into these numbers, consider talking to a financial planner or even an independent insurance agent to get advice about what coverage amount and policy type may work best for you.

How Do I Get a Life Insurance Policy?

To get life insurance, you'll need to fill out an application and provide details about your health history, such as whether you smoke, your age, height and weight, any chronic conditions you may have and any medications you take.

Your application then will go through the insurer's underwriting process. They'll determine whether to approve you for a policy and at what coverage level. For example, you may apply for a $500,000 life insurance but only get approved for a $250,000 policy if the insurer determines that you represent a higher level of risk. In some cases, you also may need to take an in-person medical exam before you're approved for a policy.

Once you're approved, you can sign the agreement and begin paying your monthly premiums. It's important to pay your premiums like clockwork every month — if you let your insurance lapse, you could lose this coverage.

How Can Life Insurance Help Me in Retirement?

With a cash value component, a whole life policy can be a valuable financial tool in retirement. This feature could allow you to make a withdrawal or take out a loan against your policy's cash value to offset different expenses — for instance, paying your current mortgage, putting a down payment on a house, helping out with your grandchildren's college or even paying down other debts. This safety net can keep you from dipping into your retirement savings earlier than you would like. Just be aware of the potential tax consequences: It may not be a good idea to take out a loan or withdraw from your policy if the taxes or interest you'll pay will be larger than your other debts.

You also can use this feature to pay your premiums, depending on your insurer. However, if you take this option, your premiums will be deducted from your policy's cash value, reducing the payout your beneficiaries receive.

Understanding the Financial Benefits of Life Insurance

Life insurance is an essential part of financial planning for many families. It can help replace lost income after the loss of a parent, spouse or family member, and it goes a long way toward maintaining your family's quality of life after you pass on.

It's important to carefully consider all of your options for life insurance and weigh whether a term or whole policy is right for you. Likewise, carefully research the ideal benefit amount your family needs. Keep in mind that you will need to go through an application process before a life insurance company approves you.

Depending on the type of policy you have, you may be able to use life insurance in retirement. However, there is a possibility of incurring tax penalties or reducing your death benefit. Be sure to talk with a financial advisor when making life insurance decisions for you and your loved ones.