Life insurance traditionally has two principal purposes: to provide money that will allow survivors to meet their living needs and to provide funds to pay estate taxes.

These goals vary. If your spouse is much younger and has a good job, providing for his or her living needs may be quite easy. On the other hand, if you are the sole breadwinner and have several children to send to college, needs are likely to be very large.

Providing money -- "liquidity," the estate planners like to say -- to pay estate taxes is a problem not everyone faces, but for those who do, failure to plan for it can be devastating. Estate taxes are very high, up to 55 percent, and while there are provisions for paying them over time, people who die leaving large illiquid estates, such as farms or businesses, can leave their heirs no choice but to sell out in order to pay the taxes.

Life insurance gets very favorable treatment in the tax code -- death benefits are not subject to income taxes, for example -- so that there are many ways to use this kind of coverage to ease the burden on your heirs. However, many of these, such as life insurance trusts, are complicated and require the assistance of a lawyer or other expert.

It is true also that many people have no need for life insurance at all. For example, if you have no survivors to protect, or your survivors are able to fend for themselves, buying insurance simply takes money out of your pocket to give them (and your friendly insurance salesman) a windfall.

Choosing the best type of policy is a separate question, which will be addressed next week. The purpose of the accompanying work sheet, supplied by Alexandra Armstrong Advisors Inc., a financial planning firm in Washington, is to get a general idea of how much coverage you need.

The first step is to examine what insurance you already have. If you haven't purchased any yourself, check with your employer. Group life insurance is an increasingly common fringe benefit today. You may be covered, or you may be able to get coverage, if, at the end of this exercise, you find you need it.

If you have a policy but have borrowed against it, subtract the outstanding loan balance.

After checking your existing insurance, look at what cash you have -- including savings accounts and certificates of deposit -- and what things you own that could be easily converted to cash if needed.

Check your retirement plans -- if you die, would your heirs receive a lump sum? If so, how much?

Add these amounts and then compare them to what you need.

Are you going to have to pay estate taxes? Note first that assets inherited by one spouse from another may pass without tax. However, at the death of the second spouse, taxes will be levied on the estate if it is larger than $650,000.

In Part 2 of the chart:

Estate taxes are levied on the value of all assets owned by a person at death. These include business interests, certain types of trusts, real estate and personal possessions. They are valued at what they would get on the open market, minus any debts, such as mortgages, owed by the dead person. If you are subject to estate taxes, figure that they will equal roughly half the value of the estate above $650,000.

Administrative expenses. As a rough figure, allow 5 percent of your estate.

Funeral expenses. Around here, $6,000 is a common figure. If you plan an elaborate funeral, allow more; if you'll be sent back to a small town to lie in the family plot, allow less.

Liabilities. If you have debts that become due on your death, include them. Otherwise, decide if you want your survivors to pay off debts, such as your home mortgage, or whether you want to provide income to make the payments. The person in the example allows the heirs to keep paying. If you want the note paid, enter the outstanding balance and reduce expenses accordingly in Step 5.

Emergency fund. Planners recommend that survivors have enough cash for three months of living expenses. Look over your expenses for the past three months or so to see what that adds up to, but make sure to take into account any large payments you have to make once or twice a year that otherwise might not show up in a quick snapshot.

College education fund. Like mortgage payoffs, college costs can be funded out of cash flow or pre-funded at death. If you wish to pre-fund, as the example does, enter the total you expect to pay for college here. If you opt to have your heirs pay the tab out of cash flow, increase your expenses accordingly in Step 5.

Other. Are there other costs that would have to be paid at your death or soon after?

Subtract the total in Step 2 from the total in Step 1. This is what you have left after expenses to invest to generate income. Note that the following calculations assume that after immediate costs are covered, your heirs live off the income generated by the remaining assets and insurance. The calculations also assume that you can get a 6.5 percent annual after-tax return on your investments.

Now look at the income your heirs will have after your death.

Does your spouse have a job, or could he/she get one?

Would your spouse be entitled to any survivor benefits under your pension plan? If so, how much would that be annually?

Do you have rental property?

Social Security is very difficult to estimate. Benefits vary with age and sex and with earnings and with the number of dependents. The Social Security Administration will provide an earnings and benefit estimate if you fill out a form. Call 1-800-234-5772.

For investment income, assume the sum in Step 3 earns 6.5 percent (.065) a year.

To figure your expenses, refer to your earlier calculations for a cash cushion and annualize it. That will give you a quick answer if you merely want a ballpark figure. Most planners recommend, though, that families watch their expenses closely enough to know what they add up to. This might be a good time to take a good look at your cash flow, combing through checkbooks and other records to see what you actually spend.

Remember, too, that your spouse can probably live on 75 percent of what you both required together if he or she has no one else to support. On the other hand, if you would be leaving a spouse and several young children, there may be little or no reduction in living expenses.

Subtract the sum in Step 5 from the one in Step 4. If the result is positive, you need no additional insurance. If it is negative, divide the number by 6.5 percent (.065) to get the total additional insurance you need.

However, before you rush to call your insurance agent, look over your balance sheet. If you have other assets, such as a tract of land, that could be sold if necessary, weigh your situation carefully. Insurance isn't cheap, and you may decide that selling a high-value, low-yielding asset to fund expenses like college or even some of your survivor's day-to-day living costs makes more sense.

.........................................You.....Example

1.TOTAL ASSETS AVAILABLE UPON DEATH

Life insurance proceeds (Less loans).............$100,000

Assets easily liquidated.......................... $50,00

Deceased spouse's retirement plans................$100,000

...TOTAL ASSETS AVAILABLE.........................$250,000

2.TOTAL IMMEDIATE COSTS:

Estate Taxes (federal and state).......................$0

Administrative expenses........................... $1,000

Funeral expenses................................... $6,000

Liabilities............................................$0

Emergency fund......................................$18,800

College education fund..............................$60,000

Other..................................................$0

...TOTAL IMMEDIATE COSTS............................$85,500

3.ASSETS AVAILABLE TO INVEST:......................$164,000

...(Steps 1 minus Step 2)

4.TOTAL ANNUAL INCOME:

Survivor's salary (after tax).....................$30,000

Spousal pension benefits (after tax)..............$10,000

Net rental income (after tax).........................$0

Social Security...................................$16,800

Investment income.................................$10,700

...TOTAL AFTER-TAX ANNUAL INCOME..................$67,500

5. TOTAL ANNUAL EXPENSES: ........................$75,000

6. STEP 4 MINUS STEP 5: ........................$(-7,500)

7.RESULTS OF STEP 6 DIVIDED BY 0.65: ............$115,000

ADDITIONAL INSURANCE NEEDED......................$115,384