Quite often deciding whether to buy life insurance is one of the most important decisions you will make in your financial life. However, it is a decision that most of us will put off until something happens that hits close to home. That’s really not too surprising since we all have a built in mechanism that puts off thinking about death, but that kind of procrastination can be devastating to a family or business.

There are three basics questions that have to be asked concerning life insurance and they must be asked and answered in the right sequence. Do I need life insurance? How much do I need? What kind should I buy?

Ask yourself, will anyone suffer financially when you die? This could be your spouse or children, ageing parents, a business partner or your employees. In all cases, if your answer is ‘yes’, then you need life insurance. We may be inclined to think that those we leave behind will be okay, and that may be true, but remember, you won’t get the chance to change your mind once you are gone. We need to face reality while we can do something about it.

Experts recommend that you insure yourself for anywhere from five to 20 times your annual income. So how do you determine if you require $100,000, $250,000, $500,000 or more in life insurance coverage? The best way to figure out what you need is to ask a life insurance professional to conduct a financial needs analysis. You start by gathering all your personal financial information and estimating how much your family members would need in order to meet their financial obligations in the event of your death.

To calculate this figure you need to think through three types of expenses:

• Immediate expenses — funeral costs, taxes, outstanding medical bills and other debts such as vehicle loans and credit card balances.

• Ongoing expenses — money for your family to live on for a specific period of time to help pay for everyday living expenses such as food, utilities, mortgage/rent, transportation and healthcare.

• Future expenses — retirement or a college savings plan.

After you have determined your family’s needs, tally up all the resources that your surviving family members can draw on to support themselves such as a spouse’s income or savings. The difference between your family’s needs and the resources in place to meet those needs totals your need for additional life insurance.

Life insurance fills the financial gap that exists between your financial need and your financial realities.

There are two fundamental considerations that go into answering this question — how long will you need the coverage and what can you afford to spend?

How long will you need the insurance? This question will help you decide if you want term or permanent insurance. Many people underestimate how long they will need life insurance.

How long you need the insurance for is often determined by why you want the insurance in the first place. Is it for business or personal reasons? For business, it can be used to fund a buy-sell agreement in a partnership business or it can allow time to replace an owner or key employee.

Life insurance for personal use, can provide the funds to pay off a mortgage if there is a premature death and it can provide funds needed if inheritance tax is due for property that you have inherited which is not Registered as Primary Residence.

Life Insurance is a long-term investment and commitment. Therefore, you should research the company you are contemplating for this purchase. Here are five things you need to consider before you make your purchase (listed in order of importance):

• Financial rating — This is an excellent indicator of the strength and stability of a company.

• Products — Does the company offer the products that are right for you?

• Customer service — Prompt response to the client means prompt response to beneficiary.

• Claims ethics — Does the company have a record of paying claims promptly?

• Premium cost — Are you getting the best value for your premium dollar?

A properly designed insurance programme is as essential to a sound financial plan as a strong foundation is to a home. Do it right and the future is secure.

Jonathan Robinson is sales manager at Colonial Life Assurance Company Ltd.