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When purchasing a life insurance policy, you select a sum of money that will be payable at the time of death and name the person or persons who are to receive that money (these are known as the "beneficiaries"). You may also have the right to determine whether that money will be paid in a single payment or a series of payments.
All of these choices depend on what you want insurance to do for you and your dependents. Most people buy life insurance to provide financial security to their families in the event of the insured's death. If this is your reason, the first step in calculating how much insurance to buy is to identify the likely financial needs of dependents. If you are married, in a civil union or have a significant other, you will need sufficient coverage to minimize the financial needs of your spouse or partner after you are gone. If you have dependent children, you may want to help pay college tuition and other expenses. If your annual living expenses like a mortgage on your home, personal or auto loans or property taxes are high enough, you will need more insurance than someone whose home loan is fully paid.
You may also want sufficient coverage to ensure that your dependent family members do not have to pay the final costs, such as hospital costs and burial costs.
Next, you should make a list of all the sources of income and assets that your family would have if they were without you right now. This list may include cash in checking and savings accounts, the value of any securities and bonds you own, your home equity and social security benefits. Check if you are already eligible for group insurance. If you do, consider taking advantage of it and adding the nominal amount to your current assets. Don't forget to include the ability of other members of your family to make a living.
The final step is to compare the total revenue and activities with the total expenditure for dependents. Ideally, you should buy enough life insurance to make up for the difference between what your family members would have if you died today and what they would actually need. However, it is important to buy only the life insurance you can afford. Buying a policy that you can't afford and then lose it because of your inability to pay premiums is thrown away at a good price.
One last consideration: the amount of insurance coverage you need to protect yourself and your family when you're young is different from the amount you need later on in life. If you already have a life insurance policy that you purchased years ago, you should take another look at the policy and your needs. Maybe your circumstances have changed dramatically since the policy was purchased. You may need to purchase additional insurance or you may be able to reduce your coverage to meet current needs. Regularly review your life insurance policy to make sure it still meets your needs.