So you may have heard of life insurance. What exactly is it? Generally, if you look at it, they cover three main things: death, total permanent disability, or terminal illnesses.

Today, I'm going to be telling you three things you need to know before you purchase a life plan or a death plan.

1. It covers you in the event of Death, TPD, or TI

So the first thing you need to know before getting a life plan is that it covers you in the event of death, total permanent disability (TPD), or terminal illness (TI).

So a life plan really covers you in the event of premature death, dying too early. In the event of premature death, the life insurance plan will pay you your benefit, or sum assured.

Total permanent disability or TPD, as it's commonly known, is defined as an inability to earn an income for an extended period of time. Now, this could be defined as three months, six months, or even longer. Check with your insurer.

A terminal illness or a TI is really a condition that's defined as having a life expectancy of less than 12 months.

So we know what life insurance is for. It covers us for death, permanent disability, and terminal illnesses. But what's it really for?

2. It is to cover your Existing Liabilities & Living Expenses of your dependents

So the second thing you need to know before you buy a life plan is that it is to cover your existing liabilities, as well as the living expenses of your dependents, or next of kin.

For example, I have a housing loan of half a million dollars. If I were to die, my wife and kids may have to take on the liability. So I want to be covered for that existing liability.

I also want to cover for my wife's living expenses as well as my kids. So for example, if I pass away today, [they need] they'll need the money to continue living in my absence. That's what life insurance is for. It isn't for me, it is for my dependents or in next of kin. Ideally, the amount of coverage I get should be enough to pay for their living expenses, at least to the point of my kid's independence.

3. How much do you actually need?

So the third thing you need to know about life insurance is that how much do you actually need.

A quick way of calculating is taking the sum of all your existing liabilities plus your yearly expenditure for your family and kids, multiply that by the number of years that you need to support the kids in the event, you're gone.

For example, if I have half a million dollars in a housing loan, I need to cover that and if I spend say, $30,000 a year on my kids' living expenses, and my kids are only a year old, I'll need to cover them for the next 20 years.

So $30,000 times 20 years, $600,000. Combine the two, I have half a million plus 600,000. I'll need minimally death coverage of $1.1 million.

But if that's too complex, the rule of thumb is to get 10 years of your annual income first.

Check with your provider. They should be able to help you calculate.

So those are the three things you need to know before you get a life plan.