How much life insurance coverage do you need? Rather than follow a pre-set formula or one of the various “rules of thumb,” you should evaluate your personal situation carefully and purchase adequate insurance while not buying unnecessary coverage. Your life insurance should be able to provide funds for:

* Any immediate needs your family may have at the time of death, such as medical expenses, funeral costs and estate taxes or probate.

* Expenses your family may incur during a readjustment period, such as time for a surviving spouse to find a job.

* Income your family would need to maintain their standard of living.

* Your children’s education and your spouse’s retirement.

* Paying off a mortgage or other personal and business debts.

Which type of life insurance do you need? Basic coverage is known as term life insurance, which will be in force for a specific time period. Often, this coverage is appropriate for a finite need: you might want family protection until your children are living independently.

The alternative to term life insurance, permanent life insurance, includes an investment account known as the cash value. As permanent insurance, this coverage might be necessary for an ongoing need, such as estate liquidity.

Annual premiums for permanent life policies may be much higher than premiums for term life policies. However, permanent life offers additional tax advantages. Over long holding periods, permanent life policies may turn out to be excellent investments.

If access to a policy’s cash value is important, you may want to own it outright. On the other hand, there may be excellent reasons for holding a life insurance policy in an irrevocable trust. In a trust, the policy proceeds may not be subject to estate tax, creditors, or squandering.