If you support a family, life insurance is more of a necessity than an option. A sound life insurance policy will put you mind at ease so if the unthinkable were to happen, you know your family would be covered in the event of your death.

While there are different types of life insurance policies you can get, life insurance typically works like this-you pay monthly premiums to guarantee that a specified amount of money will be available to your named benefactors in the event of your death.

How much life insurance do I need?
In order for your life insurance policy to serve its purpose (i.e., provide financial security for your loved ones in the event of your death), it needs to be a sufficient enough amount to not only cover your income loss, but any unexpected expenses or things you may not have thought about.

On the other hand, you could be persuaded into purchasing a policy that is more than you need, wasting money each month on premiums when in reality your needs could be covered by much less.

In order to determine how much life insurance you will need, there are a number of things you will need to take into consideration. There are many websites that have calculators that are very useful in helping you decide, based on income and expenses, the right amount.

One of the first things you will need to do is decide which type of life insurance you want. Basically, there are two types of life insurance: term and permanent.

• Term. Term life insurance is a life insurance policy you purchase that is good for a specified period of time; usually, between 5 and 30 years. With this type of policy, you are not covered for life-only if you die during the time on the term. Many people get term life to cover time periods that are more costly than others; for example, raising children, paying college expenses, or paying off a mortgage. Term insurance is typically less expensive than permanent life insurance, but you are banking on the assumption that you will die in a given period of time, rather than the security of knowing you are covered for life.
• Permanent. There are several types of permanent life insurance, like whole life and universal. Permanent life insurance is designed to be bought at a young age and kept throughout the remainder of your life. Premiums in the beginning are more expensive than they need to be for someone who is young and healthier, offsetting the higher amount you should be paying as you age. This is called leveling. Permanent life insurance also builds a cash value, or percentage of your monthly premiums, that you can access during your lifetime while you are still alive.

Once you have an idea of which type of life insurance you would like to get, you can then go about calculating how much you need. As a general rule, many insurance agents recommend you purchase a policy that is 6 to 8 times your gross income. When it comes to determining how much you need, two things should be considered:
1. How much you will need to pay for immediate obligations after your (funeral and medical expenses)
2. How much your family or beneficiaries will need to maintain the household, and for how long, after your death. Some people get policies that will take care of their families for life; others get policies that will cover expenses for long enough for the kids to move out of the house or for the spouse to get a job, go through school, etc.

The following should be taken into consideration when calculating the amount of life insurance to buy.

Final expenses
Your final expenses are those things that will most likely be related to your death. This includes such things as medical expenses not covered by insurance (which can be very costly, depending on the procedures) and funeral expenses (the average funeral costs run about $6,000 to $8,000). In addition, if you have a large estate worth more than $1.5 million, your final expenses could be higher as a result of state "death" and inheritance taxes. A rule of thumb for this amount would be $15,000 or 4% of your total estate, whichever is more.

College costs
If you have children, you may also want to factor in the cost of their educations into your life insurance policy. Include in this amount the total amount of anticipated college costs, including such expenses as housing and books. If your child already has a college fund or money from another source, subtract the projected college costs from that number.

Mortgage
The cost of your mortgage, or at least a portion of it, should also be included in the total when determining how much life insurance you will need to buy. Even if your beneficiary does not pay off his or her mortgage, a generous amount should be included to cover mortgage payments until your spouse gets a job that could cover it or moves. (This is one area where it is important to communicate with your beneficiary-will you be paying off the mortgage, or do you only want an amount that will cover mortgage payments for a period of time?)

Annual income
The annual income amount to be considered would be the total amount your family or beneficiaries need in order to maintain their current living standards with your current income. A rule of thumb is 60-75% of your total income.

Outstanding debts
You should also calculate your current outstanding debts, excluding your mortgage. This includes things like auto loans, credit card debt, student loans, and so forth.

Current life insurance
Many employers often provide life insurance to their employees free of cost. This is usually one or two times the employee's annual income. Subtract this amount from your total when determining how much life insurance you will need to purchase.

Savings, investments, and 401k.
This includes your bank and savings accounts, mutual funds, CDs, stocks, 401k from your employer, and any other assets and investments.

Other costs
You will want to take into account costs such as food and clothing for children as well as other unexpected costs. For example, if you are the primary breadwinner and your death results in no insurance for the family, then you will want to figure in added costs for medical and dental, such as orthodontia.

Who should be covered?
Another thing to consider is whether or not to cover the primary breadwinner or both spouses. Life insurance is designed to cover expenses should the main provider of the family die, but if there are two people who are bringing in income and both incomes are required to sustain the current lifestyle, then both people should be insured. Some insurance agents also recommend covering a spouse who stays home with the children for a smaller amount to cover childcare costs or household services that would have been taken care of by the parent.

If you were to assume your spouse would work after your death, you will need to consider his or her annual income and how many years they plan on working.

Other things to consider
There are other things to take into consideration when determining how much life insurance you should buy. Experts say many people make the mistake of thinking their expenses will be cut in half if a breadwinner dies. While a food bill may go down, or you may not need a second car, in most cases your expenses will stay the same or go up.

Another thing to consider is the emotional impact the death will have on the beneficiaries. So even if the spouse has a well-paying job, he or she may need to cut down on hours or take some time off work to care for children or prepare arrangements. In addition, a sudden unexpected death may require counseling for family members. There are many expenses that should be considered.

Your insurance agent, or online life insurance calculators, can help you make an even more personalized calculation by taking into account such things as the annual inflation rate, marginal tax rate, after-tax net investment yields, and other important factors that will influence how much your policy should be.

One of the most important things you will need to do is communicate with your spouse or beneficiary about what they would do in the event of your death. For example, does the spouse want to pay off the mortgage? Does he or she want to be able to stay home with the kids? These things will factor into how much you will spend on your life insurance policy.