Life insurance is an essential part of financial planning. One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner. The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die. Life insurance proceeds could mean your dependents won't have to sell assets to pay outstanding bills or taxes. An important feature of life insurance is that there is no federal income tax on proceeds paid to beneficiaries.

Before buying life insurance, you should assemble personal financial information and review your family's needs. There are a number of factors to consider when determining how much protection you should have. These include:

• any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes;  
 
• funds for a readjustment period, to finance a move, or to provide time for family members to find a job, and  
 
• ongoing financial needs, such as monthly bills and expenses, day-care costs, college tuition or retirement.  

Although there is no substitute for a careful evaluation of the amount of coverage needed to meet your needs, one rule of thumb is to buy life insurance that is equal to five to seven times your annual gross income.

Our Life Insurance calculator can give you a rough estimate of how much life insurance you may need.

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of a specific period, which can be from one to 20 years. The premium rates may increase at each renewal date. Many policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.

Permanent insurance provides lifelong protection and is known by a variety of names. As long as you pay the necessary premiums, the death benefit will always be there. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, it could be the wrong type of insurance for you.

Most permanent policies—including whole life, ordinary life, universal life, adjustable life, and variable life—have a feature known as "cash value or "cash surrender value." This feature, which is not found in most term insurance policies, provides you with some options:

• You can cancel or "surrender" the policy—in total or in part—and receive the cash value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value. There may be possible tax ramifications if you surrender a policy.  
 
• If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specific period of time, or to provide a lesser amount of protection to cover you for as long as you live.  
 
• You may borrow from your policy's cash value. However, taking out a policy loan can have a significant impact on your policy's performance and future dividends, and should you die before the loan is paid off, any outstanding balance and interest will be deducted from the death benefit.  

Talk with your tax consultant about possible tax implications before making any decisions on the use of your policy.

The cash values of many life insurance policies may be affected by your company's future experience, including mortality rates, expenses and investment earnings.

Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash value is the amount available when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.

 Advantages:

—Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection is often greatest.

—It's good for covering specific needs that will disappear in time, such as mortgages and car loans.

 Disadvantages:

—Generally, premiums increase as you grow older.

—Coverage may terminate at the end of the term or may become too expensive to continue.

—Generally, the policy doesn't offer cash value or paid-up insurance.

 Advantages: 

—As long as the necessary premiums are paid, protection is guaranteed for your entire life.

—Premium costs can be fixed or flexible to meet personal financial goals.

—Policy accumulates a cash value that you can borrow against. Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.

—The policy's cash value can be surrendered—in total or in part—for cash or converted into an annuity (an annuity is an insurance product that provides an income for a person's lifetime or for a specific period of time). There may be possible tax ramifications if you surrender a policy.

—A provision or rider can be added to a policy to give you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.

 Disadvantages:

—Required premium levels may make it hard to buy enough protection.

—It may be more costly than term insurance if you don't keep it long enough.

About 1,800 companies in the United States sell life insurance. While some consumers prefer to buy policies directly from a company, most people buy life insurance through Financial Representatives or brokers. Much of the information provided here will be helpful whichever way you decide to buy life insurance.

Before purchasing a policy, check the company's financial condition. You can do this by asking the financial representative or requesting information from your state's insurance department. A number of insurance rating services rate the financial strength of companies. These ratings can be found in large public or business libraries, or can be obtained directly from the rating service. There may be a fee for the information.

You can access Northwestern Mutual's ratings from Standard & Poor's, Moody's, A.M. Best, and Fitch (formerly Duff & Phelps) - four of the largest rating services.

Also check with the state insurance department to be sure the company is licensed in your state.

Collect the names of several Financial Representatives through recommendations from friends, family and other sources. The following are some questions you might want to ask a potential representative:

• Are they licensed in your state? All states require that representatives be licensed to sell life insurance. In addition, representatives who sell variable policies must be registered with the National Association of Securities Dealers and some states also require additional licenses.
• What company or companies does the representative represent?
• Does the representative have any professional designations? Professional designations include Chartered Life Underwriter (CLU) and Life Underwriter Training Council Fellow (LUTCF). Representatives may have also qualified to have the designation Chartered Financial Consultant (ChFC) or Certified Financial Planner (CFP®).
• Are they a member of a professional association? The major association for Financial Representatives is the National Association of Insurance and Financial Advisors. (NAIFA). Through NAIFA's local associations, Financial Representatives can attend educational seminars and can stay on top of trends in the business. Similar training and services are provided through the Society of Financial Service Professionals (formerly the American Society of CLU & ChFC).

A Financial Representative should be willing and able to explain various policies and other insurance-related matters. Let your representative know what you expect from them. You should feel satisfied that the representative is listening to you and looking for ways to get you the right type and amount of insurance at an affordable price. If you are not comfortable with the representative, or you aren't convinced they are providing the service you want, find another representative.