If you have dependents who rely on your income, consider whether you need to purchase life insurance. Proceeds from your life insurance can be used for purposes such as:
  • Providing replacement income for your beneficiaries and other dependents. This includes your spouse, children and other parties who depend on your for financial support.

  • Paying off any mortgages.

  • Paying your final expenses. This includes funeral costs and medical expenses

  • Paying any taxes that your beneficiaries may owe on assets they inherit from you.
Consideration should be given to the amount of years for which the replacement income would be needed, and the expenses that you want to cover, so as to make a reasonable determination of the amount of insurance that is needed. When determining how much life insurance is needed, consider other sources from which your survivors may receive income, such as your retirement savings account, social security income and income they receive from their own employment.

When purchasing life insurance, you have several options, including:

  • Term life insurance, which covers a specific number of years. With term life insurance, your beneficiaries would receive a payment only if you die within the specific term. For instance, if you purchase a term life policy for twenty years, your beneficiaries would receive a death benefit only if you die within the 20-year period.

  • A whole life or permanent policy that pays a benefit as long as the policy is in effect at the time of your death. This applies regardless of the age at which you die.
There are different options for each type. For instance, when purchasing term life insurance, you have the option of purchasing a level term policy or a decreasing term policy. Under a level term policy, the death benefit that would be paid to your beneficiaries remains the same for the life of the policy. With a decreasing term policy, the death benefit decreases as the policy ages.

With a whole life permanent policy, options generally include ordinary life, universal or adjustable life, variable life and variable universal life. These provide options for adding a savings account, some of which include options to invest the savings in the stock market. In some cases, the amount accumulated in the savings account can be used towards reducing your premium amounts.

The type of insurance determines the premium payment amounts, with the premiums for term life insurance being much lower than the premium payments for whole life insurance. If you are considering purchasing life insurance, be sure to factor any insurance provide by your employer into your decision-making process.

Next: The Complete Guide To Retirement Planning For 40-Somethings: Paying For College »

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