HE-0656, Reprinted August 1998. Fred Waddell, Extension Family Resource Management Specialist, Associate Professor, Human Development and Family Studies, Auburn University. Originally prepared by Josephine Turner, Extension Program Specialist, Professor, Human Development and Family Studies, Auburn University.

---

Know Your Life Insurance Needs

What Is Life Insurance:

You may buy many kinds of insurance during your lifetime, but life insurance probably will cost the most. All too often, people who buy life insurance know less about it than anything else they buy.

The basic idea of life insurance is simple, but the details can be hard to understand. Learning these details helps you get the most for your dollar. It also helps you know your family will have income when you die.

Why Do You Need Life Insurance?

Life insurance leaves money for your family if you should die early. Some life insurance plans have savings features. Remember, protecting your dependents (those who count on you for financial support) in case of your death is the main reason for life insurance.

How Do You Choose A Life Insurance Policy?

It's simple if you follow these steps.

1. Decide if you need life insurance. If so, how much do you need?
2. Learn about the different kinds of life insurance policies and see which best fits your needs.
3. Compare policies from different companies for costs and benefits.

---

How Much Life Insurance Do You Need?

Most people don't have enough life insurance. In 1985, the average American family with insurance had $74,600 of life insurance. This amount was less than 26 months of average take-home pay for the family. In Alabama, the average amount per family in 1985 was only $64,300.

An agent selling life insurance may tell you to "buy now" because your premium (insurance cost) will cost more later. Others argue that if you don't need insurance now, saving your money and investing it is better. This may be true. It depends on your ability to save and your health. Before you decide to put off buying now, consider your chances of getting an illness or injury later in life that could make you uninsurable.

Children don't need life insurance unless they are family wage earners. You, as head of the household, should buy insurance on your life to protect your children in case of your early death. Again, there is one exception. If you get support payments for a child and these are important to your family's income, you may want to buy life insurance for that child.

Say you've decided you need life insurance. How much is enough? There is no simple formula that tells you the right amount.

One way often suggested to figure how much life insurance you need is to use a formula. Some experts suggest buying life insurance equal to five times your yearly income. Using this formula helps you buy enough insurance for your family's current money needs. This formula assumes that there is group life insurance from work for an amount equal to one year's salary. It also assumes that the person who will get the life insurance payment is eligible for social security survivor benefits.

If both husband and wife work, buy insurance on both. You need more insurance on the person with the highest income. For example:

Using this rule, buy life insurance

In this example, using the five times annual income rule, you should buy $25,000 more insurance on your spouse's life than on your life.

Other formulas figure in the income needs and financial goals specific to your family, such as ages of your children, current income, pensions, property, veteran's benefits, social security, savings, health of your spouse and children and amount of money you have to spend on insurance. Extension Circular HE-516A gives a step-by-step guide on how to figure insurance needs. You can use other methods such as the ones in the March 1988 issue of Changing Times magazine and the June 1986 issue of Consumer Reports.

Remember, there is no final formula for deciding the amount of life insurance you need. So be careful! Don't buy it if you don't need it.

For more information, contact your county Extension office. Look in your telephone directory under your county's name to find the number.