Life Insurance

Having too little life insurance can be devastating to your family should you make an early exit. Having too much is an utter waste of money. That makes knowing how much you need-and what type of coverage is best for you-a critical decision.

• SEVEN THINGS YOU SHOULD KNOW WHEN CONSIDERING LIFE INSURANCE

1. Determine if you need life insurance. If no one, such as a spouse or a child, depends on your income, then it's pointless for you to insure yourself. Life insurance is protection against lost income-no more, no less. Similarly, if you are well-off financially, your family may not need an influx of cash when you die.

2. Calculate how much coverage you'll need. Determine how much your beneficiaries need to live on, and for how long. Losing a loved one is difficult emotionally and financially, and many dependents will want a period in which they won't have to worry about money.

3. Choose what type of coverage best meets your needs. Insurance is protection, not an investment. Think of insurance in terms of decreasing responsibility as you get older. When you are younger and have kids and a mortgage, you need protection. As you get older, your kids have graduated and you likely have few or no payments left on your mortgage, so you need less protection.

4. Term life insurance is the simplest way to go-you pay the premium and are covered for a specific benefit for the period during which you want coverage. When you stop paying, you stop being covered. Term is a much cheaper option in the long run, and you can invest the money you would have otherwise paid for whole life insurance in mutual funds.

5. Universal life policies allow you to adjust your premiums as well as your death benefit. Variable life lets you choose how to invest the policy's cash value. A portion of what you pay in premiums goes into a cash value, which could increase over time and can be redeemed before your death. Unfortunately, the mortality expense of all cash value policies goes up significantly after age 60, so that you could be in the situation where your payment goes up drastically or your investment account used to pay your premiums quickly dries up. If you die with a large cash value balance, your beneficiary still gets only the face amount, not the face amount plus the cash value.

6. Whole life insurance has significant drawbacks. First, the premiums are generally far more costly-especially in the early years of the policy, when you're mostly paying commissions rather than building cash value. Second, if you have to cash out the policy early, you may have to pay a surrender charge.

7. Check the ratings. Insurers run the gamut from shaky upstarts to household-name institutions. Most companies are rated for financial strength and claims paying ability by independent rating agencies. Ratings from A.M. Best, Moody's, and Standard and Poor's are the most often cited.