Life insurance basics

any of us buy life insurance because we want to make sure that our loved ones remain financially secure after we die. Income replacement is the No. 1 reason people buy life insurance.

Non-earning caregivers also have an important — and often overlooked — economic value that should be covered by life insurance.

Life insurance is also purchased by those interested in achieving specific business or estate-transfer goals.

There are many types of life insurance policies depending on your goals, and there are huge price differences among different companies offering identical coverage. To pinpoint a life insurance amount for yourself, use Insure.com's Life Insurance Needs Estimator Tool.

The top reasons to buy life insurance

Income replacement To support a business To pay estate taxes

Here's an orderly way to go about shopping for life insurance:

• 1) Assess your needed life insurance amount.
• 2) Decide on the most appropriate policy type to meet goals (i.e. term, permanant, universal or variable universal).
• 3) Choose a good company by its financial strength ratings.
• 4) Comparison shop until you find a good price.
• 5) Look at ways to save money on life insurance.

Life insurance is a long-term proposition, so you should pay particular attention at time of purchase and throughout the life of the policy to the financial stability ratings of your life insurance company. Ratings indicate a company's ability to pay claims.

Assessing your life insurance needs

The first step in life insurance planning is to analyze your life insurance needs — meaning the economic needs of dependents left behind:

• Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors. You might want to ask yourself who will be responsible for any outstanding medical bills and funeral costs. What would happen if your family had to relocate or otherwise change their standard of living once you've died? The assumption of immediate death is necessary to determine the current life insurance needs for a family or individual.
• Add in the longer term financial needs of the remaining family members, such as: children's expenses, income for the surviving spouse, mortgage and other debt payoffs, college education funds and an additional emergency fund.

Because life insurance needs change over time, your life insurance amount should be reevaluated periodically. Insurance experts recommend revisiting the coverage of your policy once every five years or whenever you experience a major life event such as a change in income or assets, marriage, divorce, the birth or adoption of a child, or a major purchase such as a house or business.

In theory, you should have a declining need for life insurance as you age because fewer people remain dependent upon you for income support. Exceptions would be protecting a business entity or paying taxes on a large estate for heirs. If the purpose of buying life insurance is to pay estate taxes, then you’ll need permanent life insurance, which is in-force as long as you live and pay the premiums.