Get the lowdown on life insurance

 Learn how to protect the people you love.

It's not easy to think about how your loved ones would manage without you, but it's something everyone needs to plan for. Make sure they're taken care of with the right life insurance policy

You remind your children to grab their lunches, you always know where they left their shoes and you can tell just by looking at them that they're sick. What would they do without you? No mom likes to imagine not being there to watch her children grow up, but you'd want to know that your family was provided for if the worst were to happen. That's why you need life insurance. If someone relies on your financial support―children, parents or a nephew you help with school―you need a policy. Your work may offer one, but employers often don't offer enough coverage for large families. And once you leave the job, your coverage ends. Follow these steps to make sure you're protected.

Decide whether you need a policy

If you're single and have no dependents, you don't need life insurance. But if others rely on your support, insurance is a must, even if you don't work outside the home. "If you cook and care for children, your survivors will need to hire someone to take care of those tasks," says Kristina Sommerkamp, a certified financial planner in Boca Raton, Fla. "That someone will have to be paid."

Choose an amount

The first step is to decide how much money you will need to cover. If you don't have any children but do have other dependents, five times your annual income is a good rule of thumb. If you do have kids, increase it to eight times. If you don't work outside the home, you should check local want ads for the going rate for child care and use it in your calculation.

Pick a policy type

There are two basic types of life insurance: term and permanent.

Term insurance

Term insurance is similar to a lease for an apartment: You pay each month, and eventually the lease, or policy, is up. You chose the amount of time the policy will stay in effect when you buy it―5, 10, 15 or 30 years. If you die during the term of your policy, your beneficiary will receive a check. The longer the term, the higher the monthly payments are.

If you have the option to buy life insurance at work, it's usually a term policy. Employers often provide coverage equal to one, two or four times your annual salary. That may or may not be enough for you though. Be aware that coverage is effective only as long as you work there.

Permanent insurance

With permanent insurance on the other hand, as long as you pay the monthly premiums, the policy will not expire. Permanent insurance has another benefit worth considering: The policy has a cash value. This means that a portion of the monthly payments that you make is held in an account in your name. You can think of that money as an emergency savings fund, as a nest egg for retirement or as collateral for a loan. Premiums for permanent policies are higher than those for term policies.

Choose term if...

  • You want to get a lot of coverage and pay lower monthly premiums.
  • Your goal is to cover expenses that eventually will disappear or be paid off, such as child care, a mortgage or college tuition.

Choose permanent if...

  • You want to build up a savings account
  •  You would like to leave your money to a grandchild or a favorite cause
  •  You need some flexibility. Permanent life insurance allows you to increase or decrease your coverage if your needs change -- if, for example, you have a baby you run into financial difficulties. You can suspend payments while retain-ing your coverage.

Do I need disability insurance? Life insurance covers your loved ones if you die, but if you can't work because you're sick or injured, you'll need extra coverage.

How does short-term disability work? Short-term disability kicks in after you've missed a lot of work, say 14 days. It lasts three to six months and pays half to two-thirds of your salary. Most employers provide it, but you can't buy it on the open market.

What about long-term disability? Long-term disability can cover you for two years, five years, to age 65 or for your entire lifetime, depending on the policy. To cut costs, elect to wait 60 or 90 days instead of 30 to get your first check.

How much disability insurance should I have? Cover your income or what it would cost to pay someone for child-care and cleaning. Get partial disability to cover you if you become injured and can only work part-time or have to change jobs.