How Much Life Insurance Do You Need?

INSURANCE agents offer formulas for how much insurance you need, but the formulas are flawed. The problem is that they cram many different kinds of people, with different requirements, into the same pigeonhole. How much coverage you really need hinges on what you want it to do for you. Do not make the mistake of expecting it to do too much. In fact, insurance should be designed to maintain, not to raise, the standard of living a family has achieved.

To figure out how much life insurance you need, estimate your family's living expenses. Then determine where that money will come from, if you should die. Include your Social Security benefits, savings, assets that can be sold and your spouse's income. The gap that's left between what costs you expect and what income you can count on is what you need to cover with life insurance. So, if you are a middle income person with dependents, you are likely to need life insurance coverage in six figures. Instead of relying on any formula, go to a practicing financial planner. Make sure he or she does not sell insurance. Ask to have your insurance planned. Almost every planner has a computer program that can take in all important variables and generate the right answer.

You should use insurance only to protect dependents. Even if you are someone's provider, you may well need coverage for just a limited period, for example, until your children finish school or for the rest of your spouse's expected life. People without children often make the mistake of listening to agents who recommend buying policies while both the premiums and the risks of being medically uninsurable are low. Neither argument is convincing. If you cannot think of a beneficiary, you do not need life insurance.

When you are in the market for insurance, you can choose between two kinds of agents. The first is the captive agent; he or she is under contract to sell for just one company. The second is the independent agent; he or she can choose from among several companies to find a policy to suit each customer.

You might assume that an independent will get you the best possible deal. Don't count on it. Most independents, especially those who sell life insurance, represent only a handful of companies. And most companies pay higher commissions to agents who sell the most profitable policies. So you may be steered to a particular company even if it offers a less comprehensive or more expensive policy.

For that reason, when you want to buy insurance, let a planner guide you to the right type of policy and to an experienced agent for a top rated company.