Life insurance is a sign of adulthood. First you can vote, then buy beer. Soon you have a family or a mortgage or both. Next up: life insurance.

Erica Moore, 29, says she needs to get life insurance to protect her partner Nicole Kennedy, also 29, and Kennedy's son Darrell. But she has questions.

"I am wondering how to figure out how much I need," said Moore, an accounting clerk for Enterprise Rent-A-Car. "There is whole insurance and term and I am not sure which is the best for me. ... I am not sure what to look for."

Life insurance has been a recent priority in my house, because my husband Jefferson and I are expecting our first child late this year. We're beefing up our coverage. (We both have some through our jobs.) Initially, we had the same questions as Moore. Now for some answers.

Do you need life insurance?

If you have people who depend on your income, you need life insurance. That's what it is for -- to replace lost income in case of death.

DINKS -- dual-income couples with no kids -- don't necessarily need life insurance, "but it might be nice," said Jordan Goodman, author of "Everyone's Money Book." "When you really need it is when you have kids or a non-working spouse."

If you're single, you probably don't need it. But some financial planners say if you can work it into your budget and you think you will have a family some day, you might get some coverage now because the younger you get it the cheaper it is.

How much coverage do you need?

Every situation is different. The answer depends on your income, savings, lifestyle -- to name a few things.

But there is a rule of thumb. Financial professionals generally advise that your coverage equals eight to 10 times your gross annual income.

Moore said she and her partner each earn about $30,000 a year. Using that rule of thumb, each would want coverage for $240,000-$300,000. (She is not sure if either have coverage through their jobs. Before they buy insurance, they should find out.)

If you want a number more tailored to your situation, do some math. Figure out your family's annual expenses, leaving out expenses that would no longer apply if you weren't around -- i.e. a second car payment.

Figure out how much income you would have produced over the next 20, 30 or 40 years. "That is what you are insuring -- a stream of income earnings over a lifetime," Goodman said.

If you have children, consider whether and how the surviving parent would pay for their college education and factor that in, too.

If you are taking care of the children, then you need to figure out how much your surviving spouse would pay each year to have the children looked after. If you are planning to return to work in a few years, you need to calculate your future earnings that your spouse would lose.

There are some online calculators to help with this number crunching -- Insurance.com has one.

What is the difference between term life insurance and whole life insurance? Which is right for me?

Term life is temporary. It provides coverage for a specific time period, such as 10, 20, 30 years. Your annual premium stays the same over the course of the term. The policy pays off only if you die during that term.

Whole life is permanent coverage, meaning it is designed to stay in effect until death. So the policies always pay off, which is why whole life is considerably more expensive than term life. Annual premiums generally remain the same year to year. Whole life policies have a savings component to them. They increase in value the longer you own them, which is why these policies are sometimes referred to as cash-value policies. Depending on the terms of the policy, you might be allowed to borrow from your policy. (For sample premiums, see info box at left.)

Which is better?

In my experience, most financial planners recommend term life insurance, especially for young couples who can't afford to spend thousands more every year on whole life.

They prefer term because you can buy the most coverage at the cheapest price. And, you can take the money you'd save by not buying whole life and invest or save it on your own. They also say you don't need life insurance for your entire life -- only when you are working and earning money, not when you're 80.

Others financial gurus say whole life -- if you can afford it -- is nice because it is a forced savings plan and Americans are notoriously lousy savers. They also like that you have something to show for all your years of paying premiums and point out that only about 3 percent of term life policies ever pay out.

My bottom line: Just make sure you understand exactly what you are buying and why it makes sense for you. And ask lots of questions.

Where/who do I buy my policy from?

If you are in the market for a term policy, I recommend comparing quotes online. The Consumer Federation of America also says the Web is the cheapest way to find a term policy and among the sites it recommends are: www.accuquote.com, www.insweb.com and www.term4sale.com.

If you are buying whole life, you should see an agent, rather than buy online, because these policies are more complicated than term policies, according to the CFA.

Before you buy any insurance, check out the rating of the firm underwriting your policy. A.M. Best Co. rates firms and you can access those grades for free at www.ambest.com. You are looking for a grade of A- or better. This is a measure of financial staying power, important if your heirs need to cash in your policy.

Amy Baldwin, 32, writes about personal finance for 20- and 30-somethings in "Out of the Red." Got a question about money? Contact her at 704-358-5179 or abaldwin@charlotteobserver.com.

Life Insurance and American Families

Many financial pros say American families are underinsured -- without life insurance or with inadequate coverage.

• How many families have life insurance?

Sixty-nine percent of American families had some type of life insurance -- group or individual -- in 2001, according to the Federal Reserve's analysis of its Survey of Consumer Finance. That's the most recent data available.

• How big is the average policy?

The average-sized policy purchased last year was $157,704, according to the American Council of Life Insurers. Financial planners generally advise that policy holders have coverage equal to at least eight times their gross annual income. By that standard, the above policy amount would cover an annual gross income of $19,713.

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AMY BALDWIN
abaldwin@charlotteobserver.com

© Copyright 2006 The Charlotte Observer.