If you have dependents relying upon you financially (e.g., children), you probably need some life insurance. The big question is, how much is enough? It can take several hours to gather all the documentation needed to come to an answer, but, it can be time well spent. If you are married, you will want to calculate life insurance needs for both spouses.
One of the first things to do is to count up all of your present and future debts and expenses, such as a mortgage, car payments and the cost of college tuition. Include all possible scenarios, right up to retirement. Also, don't forget about less obvious costs, such as the loss of future income.
Next, add up the amount of your assets, including savings, retirement accounts, investments, and future Social Security and pension benefits. The Social Security Administration now mails out benefit statements that list the different types of benefits you and your family may be entitled to if you retire or pass away. With the current debate on the status of the Social Security system, you may wish to develop a couple of different scenarios that include Social Security benefits and a plan that does not. Then, you can decide which plan best fits your current financial situation to make an educated decision. During this step, you would also add in any life insurance policies that you currently own, whether individually or provided to you by an employer.
Finally, subtract your assets from long and short-term debts and other future expenses to come up to a figure of the amount of life insurance you will need. The difference is the amount of life insurance you should have to cover the needs of your dependents should you pass away. There are some good online calculators at www.insweb.com or www.insurance.com.
If you are married, and one spouse does not work outside the home, it is still important to have life insurance on his or her life as well. The services they provide in the home need to be replaced should they pass away. Things to consider in this scenario include day care, a reduction in the surviving spouse's work hours, and lost income.
Now that you have figured out how much life insurance you need, how can you tell which type best fits your needs? There are basically two types of life insurance - term and permanent insurance. Term life insurance is usually cheaper and is structured to provide life insurance for a specified number of years that will end at some point in the future, for example 20 years.
The different types of policies within the permanent life insurance category are whole life, universal life and variable universal life. All of these have some sort of investment vehicle attached to them that pays dividends on the policies. At some point, you may earn enough dividends to keep paying on the policy, thus keeping the face value of the insurance policy.
One caution about life insurance--it usually does not need to be purchased for a young child. Some people may suggest that you buy a policy for a child in case he or she becomes uninsurable in the future. A better financial move would be to use the funds that would pay the premium to increase the parent's coverage or invest in a mutual fund or another investment vehicle that may give you a better return, and may eventually become worth more than the face value of an insurance policy.