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There is no precise formula to tell you how much insurance coverage you need. Some consumer groups recommend five times your gross annual income. Under this formula, a family with an income of $40,000 might need at least $200,000 worth of life insurance protection (face value of the policy).

Some insurance industry organizations recommend a policy paying ten times your gross yearly income. With this formula, the family mentioned above would need $400,000 worth of insurance.

Before buying life insurance, assemble your personal financial information and review your needs. You should consider:  

  • Immediate needs at the time of death, such as final illness expenses, burial costs, and estate taxes.  
  • Funds for a readjustment period, to finance a move or to provide time for remaining family members to find jobs or better-paying jobs.  
  • Ongoing financial needs such as monthly bills and expenses, outstanding debts, day-care costs, college tuition, support for elderly parents, and retirement.  

You also need to take into account any assets you have, such as cash; savings; Social Security and pension benefits; other insurance, including mortgage insurance; and, real estate. Some of these assets will be available for immediate use, some to finance a readjustment period, and others may help your family meet long-term, continuing needs.  


What Kind of Life Insurance Should I Buy?  


Not all life insurance policies are the same. There are four basic types of life insurance: Term Life Insurance, Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance.  


Term Life Insurance  


Term Life Insurance policies provide a check to your beneficiary when you die. Term Life Insurance policies generally are cheaper and easier to understand than other kinds of life insurance policies. Term Life Insurance usually offers you the best value for your money by giving you the biggest death benefit for your premium dollar.

Term Life Insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term.

You can renew most Term Life Insurance policies for one or more terms even if your health has changed, although you may be required to complete a medical questionnaire and might be refused insurance if your health is poor. But each time you renew the policy for a new term, premiums may be higher because you will be older. If you are thinking of buying Term Life Insurance, make sure you can afford the premiums for as long as you want to keep the policy. You should ask the company to show you how you could expect premiums to increase over a 10-year or 20-year period.

To avoid yearly increases, you may want to look for 5, 10, 20, or even 30-year renewable Term Life Insurance policies where the premiums will stay the same for those periods. These long-term policies may "lock in" premiums for as long as you need a high level of insurance, e.g., until your mortgage is paid or your children graduate from college.

Most Term Life Insurance policies are convertible. You can exchange your Term Life Insurance policy for a Whole Life or other type of insurance policy without taking a medical exam or answering any health questions. You may decide to convert your Term Life Insurance policy if your health declines; it may be difficult for you to qualify for a new Term Life Insurance policy at affordable rates. Conversion is usually allowed until age 65.  


Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance  

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