Most people should have life insurance. If you have any dependents, if you have any loans, or if you simply want to leave a large sum of money to your family when you die then you need life insurance. The question then becomes what type of life insurance and how much cover do I need?
1. How Much Cover?
The question of how much life insurance cover you need (or what you should be aiming for) is quite complicated to work out, but the principle is simple. Ideally your insured amount should be enough to provide an investment income that replaces the amount of money that you currently earn without eroding the real value of the capital invested. Don't forget to include in this calculation any services that you currently provide for your family (e.g. childcare) that would have to be paid for if you die.
e.g. if you need to provide an annual income of $20,000 for your beneficiaries this would require an insured sum of $1,000,000 at 2% (average return on investment 5% from interest-bearing bonds less average inflation of 3% giving a real return of 2% on capital).
2. What is Your Budget For Premiums?
This is really important and you need to be realistic about how much you can really afford. There is no point being covered against the unfortunate event of your death if you cannot afford to feed your family because your life insurance premiums are too high.
3. What Type of Life Insurance?
The two main types of life insurance are term insurance and whole life. Term life insurance covers you for a specific period of time and is cheaper than whole life insurance. Whole life insurance will (as its name suggests) pay the insured value whenever you die. Your budget for premiums may force you to choose term life insurance to get the level of cover that you require. Premiums for this type of insurance are much lower than for whole life insurance. If you can afford whole life cover then you will need to decide whether the investment aspect of this type of policy is important to you.
Neil D Robertson writes on the subject of life insurance with the aim of providing people with the knowledge that they need to make there own decisions about life insurance. Visit his Life Insurance Explained site for more information.