There are a lot of things to consider when buying life insurance. First of all, do you even need life insurance? If so, how much coverage should you get? What type of coverage should you get? How long should you keep the policy in effect? And how do you know if you're getting a good price on your life insurance policy?

Do You Need Life Insurance?

Let's tackle the issue of whether you need life insurance first. The main purpose of life insurance is to provide a replacement for your income if you die. If you don't have any dependents, then you probably don't need life insurance. If you wish, you could purchase a small policy to cover your funeral expenses. Nothing more is needed.

If you do have dependents, then it is likely you need life insurance. Unless you have a lot of money saved up that your spouse and children can use to live off after your death, you'll need a policy that is big enough to provide an income in order to keep your spouse and children from having to make huge sacrifices as a result of the loss of income caused by your death.

How Much Life Insurance Is Enough?

The amount of insurance needed depends on numerous factors. If you have children, how many more years will it be before they are grown? Do you want your life insurance to cover their college education? How much do you expect that to cost? If your spouse is not currently working, does she expect to enter the workforce if you pass away? Will she need training in order to do so? How much are your current monthly expenses? Are they expected to change in the future?

If you are unsure of how much coverage you should have, a good rule of thumb might be to insure for the amount of your annual salary times the number of years your children will still be at home, plus the anticipated cost of their college education.

However, this formula assumes that your spouse will be able to get by without your income once the children are grown. How will she manage without your income? Will she have to sell the house and buy something cheaper? Will she remarry? It's a good idea to talk about these things with your spouse so that she will have a clear idea of how long the life insurance is planned to last and what steps may need to be taken to avoid running out of insurance money before she is able to support herself.

Another issue to consider is how the insurance money will be invested until it is used. What return can realistically be expected on the investment? If you can afford a large enough policy and make sure that there is a plan for investing it wisely, it may be possible to make the insurance policy last indefinitely. For example, if you make $50,000 per year, a $500,000 policy invested in such a way that it earns a 10% annual return will replace your income for a long time as long as the expected return is achieved.

How Long Should You Plan on Having Life Insurance?

Life insurance is for people who don't have enough money saved up to take care of their dependents. Ideally, you should have a savings plan in place that will eventually take the place of your life insurance policy. Once you have enough money saved to ensure that your spouse and children will be able to replace your income by drawing on the savings, life insurance may no longer be needed. You should purchase a policy that is guaranteed to be renewable for at least as many years as you think it will take to build this nest egg.

What Type of Life Insurance Should You Buy?

There are three main types of life insurance available: term life, whole life and universal life. Term life is just life insurance - nothing else. Whole life and universal life both offer some sort of cash value and try to pass themselves off as an "investment."

The problem with whole life and universal life becomes obvious if you calculate the return on a whole life or universal life insurance policy. They typically provide dismal returns. Not only that, but you can't use the cash value and still collect the full value of the policy. Either you cancel the insurance and cash it out, receiving a mediocre return on your money, or you die, in which case your beneficiary receives the insurance payout but not the cash value, even though you paid extra for insurance that offers a cash value.

For this reason, it is always a good idea to keep your life insurance and your investing separate. You will almost always come out further ahead if you buy term life insurance and invest the amount of money you saved into mutual funds or other investments that potentially offer a better return.

How to Find a Good Deal on Life Insurance

The best way to make sure you are getting a good deal on your life insurance is to shop around. Call several insurance agents and compare their rates. There are several websites where you can purchase life insurance online as well. A few sites that sell life insurance are Insure.com, Insurance.com, InsWeb.com and AccuQuote.com

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