The decision to buy life insurance is often a difficult one. Unfortunately, this difficulty is often exacerbated by the fact that an insurance salesman is trying to make a commission by selling you a policy. Ultimately, the decision of how much insurance to buy comes down to a needs analysis, or a sources vs. uses analysis.
In other words, what do you need the insurance for. Too often people buy life insurance when they don’t even need it. Take me for example, I am single with no family and no debt. Whatever assets I do have will be more than enough to pay for my funeral expenses when I die. Therefore, I have no need for life insurance at this time.
On the other hand, if you are married and live off of your spouse’s income and have three children to send to college, you probably need life insurance. In an instance like that you would want to make sure you had enough insurance to continue living without your spouse’s income and send your kids to college.
These are just examples. But the idea of the analysis is to compare how much money you think your dependents will need to do whatever it is you will no longer be able to provide to them. When doing this analysis you should also consider any other assets you have and whether or not they could be used to provide for your family. If so, you may not need as much insurance as you think. In fact, if you are extremely wealthy, often times life insurance is completely unnecessary because you can self-insure, meaning you have enough assets to provide for your dependents without insurance. The advantage of being able to self-insure is that you don’t have to pay any insurance premiums.
Another important point in determining how much insurance you should buy is determining the term of your policy. I suggest buying term insurance as opposed to buying whole insurance. The reason for this is that insurance (whether health, or life, or auto, or any other form) is designed bo protect you against a specific risk. If no risk exists, than no insurance is necessary. Eventually, you will get to a point where you will not need life insurance; after your kids graduate from college, your mortgage is paid, and you are retired, for example.
If you buy a whole policy you will always be insured, and you will always be paying premiums, even long after you no longer need the insurance. Term insurance on the other hand only lasts for a specific time period (which you can usually choose). Therefore, if you know you only need insurance for the next 20 years and after that you no longer need the insurance (because you no longer have any risks to insure), then term is better because you don’t have to keep paying for something you no longer need.