Buying life insurance to protect your family can be a daunting task. You know it's important, but you're plagued with questions: How much should you buy? What kind of life insurance is right for your situation? Should you have a local agent? What company should you choose? How can you do this all without getting ripped off?

You need the answers to these questions - and perhaps even others - before you buy a life insurance policy.

How much life insurance should you buy?

To know how much life insurance you should buy, specify what you want it to do for your family. Life insurance is a tool you can use to reimburse your family for the financial loss incurred if you die prematurely. There are three financial contributions people make to their household and family.

The first is education funding. Parents often contribute to their children's education costs. The second is debt cancellation. People spend money to pay their debts. The third is income, whether during working years or during retirement, used to pay for regular expenses like utilities.

You can protect each of these contributions with life insurance. Take notes as you read about each contribution to determine how it should fit into your insurance program.

1. Education funding

Many parents want to help pay for their children's education. If you have children, calculate the expected cost of a college education for each one. The cost can be high - even up to several hundred thousand dollars - for newborns.

Add the result for all your children together to find the total cost to fully fund their education. Decide how much of your children's college costs you would want paid if you pass away.

2. Cash needs

If you die today, you may leave debts behind. Make a list of all your household debt. Think of debt as financial obligations you can pay off entirely, like a car loan. Do not include ongoing expenses like utility bills. Write down how much money your family would need to pay off all the debts on your list. The most common debts include:

• Mortgage debt
• Home equity lines of credit
• Credit card debt
• Student loans
• Automobile loans
• Personal loans
• Funeral costs

Add anything else applicable. Total the debts to find the amount of your cash needs.

3. Income replacement

When a wage-earner in a household passes away, the household loses the benefit of their income forever. Life insurance proceeds can replace your income on an ongoing basis.

This is accomplished by placing some of the proceeds in an interest bearing investment producing a regular income stream. Ideal investments will have a very steady rate of return and low risk. Seek a 5% return and you'll find many options meeting those criteria.

To determine the amount of insurance needed to replace the lost income, multiply the annual income by 20. The result is the lump sum needed to replace the family's lost income when using a 5% return investment. For example, to replace $50,000 of income requires $1,000,000 invested at 5%.

Resist the temptation to seek higher rates of return in an attempt to reduce the lump sum value. Higher rates of return carry higher risk. You should avoid risk while planning a stable financial future for your family.

Putting it together

Total the amounts from the education funding, cash needs, and income replacement sections of your notes. This grand total is the face value of life insurance needed to meet every goal you've written down.

If you have less life insurance than your total some of the goals in your notes will go unmet if you die prematurely. If you have more than your total you are over insured and may be paying too much for your insurance program.

Recommended resource: Life insurance calculator

Do you really need so much?

It's a great question. Look back over your list and ask yourself if you would strive to meet those goals for your household if you were still alive. Would you help your children with their education costs? Would you pay off your debts? Would you continue to work and provide your income to the household?

If you were going to help your family reach those goals while alive, you should insure those needs. If you die prematurely your family has already lost you. Should they shoulder extra financial burdens without you?

You can use life insurance to meet those goals for your family even if you're not there to draw a paycheck.

What kind of life insurance should you buy?

There are four major classes of life insurance: term, universal, variable and whole life. Start with the least costly option consistent with your needs.

Term life insurance

Term is the most basic form of life insurance. It's purchased for a set period of time, called the term, which is usually 5, 10, 20 or 30 years. If you die during the policy term, your beneficiary receives money.

If you outlive the term you may have the option to renew the insurance annually at an increased cost. You can usually convert it to any of the permanent forms of insurance during the policy term without a new medical exam. This form of insurance carries no cash value and has the lowest out-of-pocket cost.

Universal life insurance

Universal is a form of permanent life insurance. It is an insurance product combined with an interest-bearing savings account. It's the least costly permanent product. If improperly configured, it can lapse early or require increased payments to keep the policy in force.

Variable life insurance

Variable life insurance functions similarly to universal products. It is a form of permanent insurance. It combines life insurance with market sensitive investments called subaccounts. Subaccounts are similar to mutual funds and may have similar names to existing mutual funds, but they are not identical.

Subaccounts react to market forces, and can rise and fall in value dramatically. This form of insurance is classed as a security and requires special licenses to sell. It is the highest risk type of life insurance and is rarely appropriate for family protection. It tends to cost more than universal products for the same face value.

Whole life insurance

Whole life is the oldest form of life insurance. It's permanent, like universal and variable life. It contains a savings account which may earn interest or dividends. Its cash value generally does not drop due to market conditions.

Its internal rate of return can be similar to a modest bond fund after the policy has been in force several years. Whole life can cost 10-15 times as much as term life for the same face value, making it by far the most expensive form of insurance of these four.

Where to start?

Since term life insurance is available in durations up to 30 years (and sometimes more) it can often be a good idea to start with term. Its low cost and simple structure make it ideal for family protection.

A 30-year policy will cover the duration of most conventional mortgages, the span of years to raise a child from birth through graduate school, and the length of nearly any student loan.

More questions to ask yourself when choosing life insurance

Should I use a local agent?

You can purchase insurance directly from the carrier or through local agents. Buying directly from the carrier sounds like a good idea because you can cut out the middleman. But this does not always change the price that you pay. The carrier can choose to keep the agent's commission rather than offering a discount.

Having a local agent can give you an advocate. It can give you someone financially beholden to you to fix problems, assist you in dealing with the carrier, and assist your surviving family when you pass away.

When choosing an agent, find out if the agent is independent or captive. Captive agents work directly for an insurance carrier and may promote their employer's products first. They have greater knowledge of their company's products and underwriting process than independent agents.

Independent agents can direct you to any carriers or products matching your situation. This gives you a greater chance of matching your needs with the right company. Many local agencies prefer working with other forms of insurance because they pay commission differently than life insurance. This can lead to local agents having little experience or expertise with life insurance.

The ideal agent has freedom to work with many insurance carriers while being a specialist in life insurance so you'll receive the expertise you deserve in an agent. Interview the agent before you buy. Ask them how much life insurance business they do. Ask how many companies they have available to them.

What insurance company should I choose?

Once you have determined the right face value, type of insurance, and agent to work with choosing a company becomes much easier. Ask your agent to provide life insurance quotes from at least five carriers.

Each proposal should include financial ratings for the carrier and an illustration. Illustrations show policy costs and values for the life of the contract. Choose only companies receiving at least "A" ratings from two or more companies like AM Best, Moody's, or Standard and Poor's.

Provide your agent with a list of all factors affecting your insurability. The most common items are tobacco use, body type, high blood pressure, cholesterol issues, and conditions requiring prescription medication.

If either of your parents died of a health condition prior to age 60 it will impact your insurability. Your agent can use this information to find carriers with the most favorable underwriting rules for your situation to help keep costs low.

Examine the finished proposals to determine which one best meets your needs for price, reliability and likelihood of favorable underwriting results.

What's next?

Underwriting starts with the application. Life insurance applications include many health questions. Be honest. If you withhold information and then pass away, the insurance carrier could potenitally deny your family's claim.

Submit a temporary life insurance receipt or binder when you complete your application. This puts the policy in force immediately even if underwriting is incomplete. If you do so, and die during underwriting, your family will receive the policy benefit. If you die during underwriting and have not done this your family usually gets nothing.

You must undergo a medical examination after submitting your application. The exam will vary based on the amount of insurance you seek, your age, and any known health issues. Your examiner will collect blood and urine samples, ask more questions, and measure your blood pressure, height and weight. The carrier may require other tests. Ask your agent what to expect.

The examiner will come to your home or place of business. Schedule an early-morning exam, and avoid eating or drinking for 8 hours prior to it. Scheduling late in the day means you'll go hungry while waiting for the exam.

Keep your stress levels as low for the 24 hours before the exam. If you have a major stress inducing event just before the exam, reschedule it. It's better to reschedule than to get inaccurately high readings.

The carrier may ask your doctor to provide an Attending Physician Statement, or APS. Let your doctor know you've applied for life insurance and a request for an APS is coming. Ask him to include a cover letter with the APS describing your medical history.

Underwriters appreciate the clarity a cover letter brings, and often view cases more positively when they include one. It might get you a more favorable underwriting result.

Once the underwriter has your application, APS documents, exam report and lab results he'll evaluate your case. You'll either be declined, or approved and assigned a health classification. This classification, your product choice and face value determine the final price you'll pay for life insurance. If your application is approved your agent will notify you and deliver the policy.

How to put it all together

Follow the steps outlined above and you should do well. You'll know ahead of time how much life insurance is right for your situation. You know term insurance is the least costly option. By looking at the list of debts to repay and considering any children's ages you'll know for what duration to purchase your term policy.

You'll be immune to sales pitches because you already have the correct numbers for your situation in hand. You'll have proposals from solid companies with documentation to support them.

Your preparation for underwriting will help you receive the most favorable results. Get started today. Your family needs your forethought and the protection of a life insurance program.

Recommended resource: Compare life insurance options