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How much life insurance should you own?

Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings. However, there are other things to consider when determining how much life insurance you need. Important factors include: income sources (and amounts) other than salary/earnings; whether or not you're married and, if so, your spouse's earning capacity; the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. Talk to an insurance adviser for a precise calculation of how much life insurance you need.



What about buying life insurance for a spouse or children?


Generally, that should not be done in lieu of buying appropriate amounts of life insurance on the family breadwinner(s). It is extremely important that you protect the earning capacity of the primary breadwinner, if possible, with the right amount of life insurance before considering life insurance on children or spouse. In a dual-income household, it is important to protect the earning capacity of both spouses. Life insurance for a non-wage earning spouse is often recommended for help in paying for household services lost if that spouse dies.



Should I buy term insurance or cash value life insurance?


Term life insurance pays out in the event of death. Cash value, which is more costly, has a cash amount you can withdraw before death. Which one is for you will depend on your circumstances. First answer an insurance question - how much life insurance should you buy? Then look at the financial aspect - what type of policy should you buy? The amount of life insurance you need may be so large that the only way you can afford it is by buying term insurance, which carries a lower premium than cash value policies. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, you can consider the financial decision - which type of policy to buy. Important factors affecting the financial decision include your income tax bracket, whether the need for life insurance is short-term or long-term (20 years or longer is long-term), and the rate of return on alternative investments. If you view life insurance as an investment, you'll want to study rates of returns. If it's protection, then your purchase is a matter of what you can afford and want to spend.



How does mortgage protection term insurance differ from other types of term life insurance?


The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies generally cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit decreases, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage--for example, a 20-year mortgage protection policy might require that premiums be paid over the first 17 years.