How to Determine How Much and What Kind of Life Insurance You Need

There are many kinds of life insurance: whole life, universal life, variable life, term life, and others. There are also many insurance salesmen, and many of them will push the product that has the highest commission instead of the best product. Here's how to make your way through the mess.

	First, determine if you need life insurance. Life insurance is designed to replace you financially if you should die. If no one is depending on your income or your work, then you do not need any life insurance. If you have someone who is depending on your income (spouse, children, other dependents), or someone who is depending on your work (for example, if you're a stay-at-home Mom), then you probably do need life insurance.
	Remember that the sole purpose of life insurance is to replace you financially if you die. Life insurance is not an investment. You should invest in real investments directly, instead of through an insurance company. Reject all the sales pitches for various form of permanent life insurance. That is, don't buy whole life, universal life, or variable life insurance. Only buy term insurance. Per dollar of death benefit, term life insurance is many times cheaper. You are far better off taking the amount of money you saved buying term insurance and investing it in real retirement accounts (401(k)'s, Roth IRA's, etc).
	To determine how much insurance you need, multiply your annual income by 10. For example, if you make $50,000/year, then you need $500,000 in insurance. If you don't have an income, but someone relies on your work, such as a stay-at-home Mom, calculate how much it would cost to replace your services (day care, extra cost of food, etc) per year, and multiply that number by 10. If you die while the insurance is in place and the money is put into the stock market, then your dependents will be able to withdraw your entire annual income each year without exhausting the account, since the stock market returns 12%/year over the long run. (12% of $500,000 is $60,000, so there is even a buffer between the $50,000 and the $60,000 in returns.)
	Write a will to state how you want the money to be used should you die.

• You want the insurance term to be at least as long as you expect to have children at home.
• Quit smoking, and you'll save a bunch of money on life insurance!
• Do not cancel any old life insurance policy - even bad ones - until your new policy is in place. (That is, until you have actually gotten confirmation from the insurance company that the policy is active.)

• In addition to avoiding whole, universal and variable life, also avoid the return of premium option on term life insurance. Return of premium is just a gimmick, and you are far better off investing the difference. If you invest the difference, at the end of the term, you will have far, far more in interest, dividends and capital gains than you would have gotten from the return of premium.