When I was growing up, I thought life insurance was meant to make your heirs rich when you died.

Well, fast forward to adulthood and reality. Life insurance for the most part is intended to be 'income replacement' should something unforeseen happen. That can mean to your family. Or a business where the loss of an owner, principal or key employee could seriously impact the stability of a company.

Basics on what to take into consideration when evaluating life insurance needs.

Families-The first question is how much money would you need if something happened to your partner to keep your family living at the current level? These days this becomes a very important issue because in many parts of the country, both the husband and wife, the mom and dad, have to work to maintain an average existence. Mortgages are high and you don't want to risk losing a home.

You can do a rough estimate in a couple of ways. Depending on your annual income you can look at doing 5-15 times your annual income. Or, you look at your annual expenses, the cost of sending kids to college eventually and come up with an approximation from there. Then we get a quote, and if the cost comes back to high, we start ratcheting back. You don't want to be left 'insurance poor' and even with less than the theoretically optimal amount anything is better than nothing. After all, you don't want to be making difficult financial decision at that point in your life.

Businesses-Similar issues come up. If you lose an owner, principal or key employee, how long is it going to take to find a qualified replacement and get them trained to step in? A business can suffer greatly, even collapse when something happens to an integral member of the team.

Life insurance can also be a part of a buy-sell agreement. You may not want to be in business with your partner's spouse especially if they were never really involved or knew anything about how to run this business. And there are many other examples of how life insurance can be used.

Which is better—term or whole life?

In a nutshell, Term life insurance is often better for young families because it is less expensive. That allows you to buy more when you are younger, because young families need higher levels. Whole Life is one type of permanent life insurance. There are other types of permanent coverage as well, like Universal Life insurance. These policies are more expensive but will also generally accrue a cash value and doesn't go away unless you stop paying the premium.

Whole Life and Universal Life are versions of what are considered permanent insurance and are a good move if you are less concerned about cost. A permanent policy is just that, permanent, as long as you make the payments. And it can also accrue a cash value that many people are now using to help supplement their retirement income, usually tax free.

There's more to it than just this extremely brief overview, so give us a call to figure out your situation.