NEW YORK (Money Magazine) - You already know that life insurance is a must if your family depends on you. The question is, how much coverage do you need? The American Council of Life Insurers (ACLI) offers this rule of thumb: five to seven times your annual earnings. But this formula can vary and "is very much a personal matter," says Herb Perone of ACLI.

The more expenses and dependents you have, the more insurance you'll need. If you've got fat retirement accounts or other assets (like an education savings fund for your kids), you can get by with less. But at a minimum, you should leave your family enough to cover big-ticket items like your mortgage and your children's college tuition. The Internet offers an abundance of fast, free places to get a rough estimate of your life insurance needs, plus rates. Among them are www.quicken.com.

You'll also face a choice between term and permanent insurance. Most experts recommend term insurance, which provides a death benefit only during the period covered by the contract, from one year to 30 years. Term insurance is much cheaper and provides more benefits for the dollar. It is also cheaper the younger you are. (The monthly premium for an annually renewable $500,000 term policy for a healthy 40-year-old who has never smoked runs $31 to $36 a month for a man, and $28 to $31 for a woman.)

That's a general rule, though. There are some people for whom permanent insurance -- such as whole-life insurance -- would make sense. Some possible scenarios: if you married or had kids late; have a much younger spouse; have maxed out on your tax-deferred savings; expect to incur federal estate taxes; or are concerned about continuing a business. Permanent policies provide a death benefit for as long as the premiums are paid, plus a savings or investment component that policyholders can borrow from or draw down as retirement income.

Commissions and expenses slow the accumulation of cash value in the early years of the permanent life policies, so you should buy one only if you plan to keep the policy for at least 20 years.

Once you've determined how much and what kind of insurance you need, it's time to do some start shopping. For term insurance, insurance companies' 800 numbers and websites can provide dozens of quotes. Group insurance offered by your employer is often a good buy, especially if you can take your policy with you if you change jobs.

When comparing life insurance policies, it's easiest to begin by viewing all types of policies as variants of the same product. You're paying a certain amount of money in order to get a certain return. That way, by reducing your insurance costs and benefits to their lowest common denominators, you can compare insurance policies to one-another as well as to other places you could have put that money. That's simple for a term life insurance policy. Just divide to figure out how much your paying per year for $1000 worth of coverage. That's the unit pricing. For permanent insurance policies, which build cash value over time, the math is just slightly more complex.

For a permanent insurance policy, think of the cash value as an investment. For example, let's say that, during a whole-life policy's first year, you pay a $3,036 premium. Suppose you put that money in another low-risk, tax-free investment -- say, a municipal bond fund that returns 6 percent a year; at the end of a year, your investment would be worth $3,218. Your policy, however, has a cash value of zero at the end of the year. So the cost of your first year of insurance is $3,218.

In this example, you're purchasing protection equal to $200,000 and your policy has no cash value in the first year. Therefore, by dividing $3,218 by 200, we see this policy costs $16.09 per $1,000 of benefit -- and there's your unit pricing for the first year of the policy.

Remember, your actual costs are not the same as your out-of-pocket costs. Each year, you invest your premium; the increase in cash value is your return. The difference between that return and the return you could have earned elsewhere, plus your premium, is what you're paying your insurance company.

As the policy builds cash value, the unit pricing will change As your cash value increases, the unit pricing will go down. Be skeptical about "policy illustrations". Make sure understand the underlying assumptions in those "real-life" examples and ask to see a worst-case scenario.

If you've recently bought have a permanent life policy, you should probably not switch over to a new one, no matter how tempting the new policy may seem. It's usually a terrible deal to surrender a permanent life policy in the first few years, because you lose out on the investment returns that come later.