Life insurance—it's one of those things almost everyone knows they should have but often put off until later. But the reality of adulthood is that the unexpected can happen at any stage and it’s essential to prepare for the financial challenges that could burden your loved ones in your absence. Whether you've just started your first job, bought your dream home or retired, life insurance helps safeguard these milestones and the people who have made them special.

There are various life insurance policies, each with its features, benefits, and ideal candidates. The options can be overwhelming, from term life insurance to whole life and burial insurance. How do you choose the right policy? And what factors influence the cost? We’ll break down each type, making it easier to decide which one aligns with your financial needs. Plus, we’ll address common misconceptions and show you how life insurance can benefit your broader financial strategy.

How Important is Life Insurance?

Simply put, a life insurance policy is a contract with an insurance company designed to provide financial support in the event of your death. You pay premiums, and in return, the insurance company pays your beneficiaries a lump sum, known as a death benefit, when you pass away.

This money can help cover significant financial hardships often associated with loss—like college tuition fees for your children, mortgage payments, or the day-to-day living expenses of a family adjusting to life without a primary earner.

Alison Salka, Ph.D., Senior Vice President and Director of Member Benefits & Research at LIMRA, shares how going through different life phases can compel one to consider getting life insurance. "Younger generations experienced a life-altering event just as they were starting their careers, getting married, and having children," she says. The realization of how precarious life can be may have made them more aware of the need to protect their loved ones."

Life insurance is not just about the final payout; it’s about providing peace of mind and financial planning for the future. Whether you are the primary breadwinner or a partner contributing to living expenses, your ability to earn and provide might be the foundation your family relies on. If this foundation ever crumbles, a life insurance payout can be the buffer against financial hardship.

According to a study by LIMRA and Life Happens, 52% of American adults have life insurance, but 41% feel they don't have sufficient life insurance coverage. Additional data indicates that over 100 million Americans believe their coverage is insufficient. Doing your best to understand life insurance can play a crucial role in guaranteeing your family's financial security.

What Policy is Right for You?

Life insurance policies come in various shapes and sizes, each tailored to different needs and stages of life. The most common types include:

Term Life Insurance policy

Term life insurance is a straightforward and cost-effective option for many people. It provides life insurance coverage for a specified period, such as 10, 20, or 30 years. If the insured person dies within the term, the beneficiaries receive a death benefit. This type of insurance is ideal for individuals who need coverage to settle healthcare and funeral costs, pay off mortgages, or support children through college.

Pros:

• Affordable premiums compared to permanent life insurance.

• Simple to understand and purchase.

• Provides high coverage amounts for a specific period.

Cons:

• No payout if the insured outlives the policy term.

• No cash value accumulation.

Whole Life Insurance

Whole life insurance offers lifelong coverage with fixed premiums and a guaranteed death benefit. It also includes a cash value component that grows at a guaranteed rate over time. This policy best suits those who want permanent coverage and can afford the higher premiums.

Pros:

• Lifelong coverage is provided as long as premiums are paid.

• Builds cash value that can be borrowed against or withdrawn.

• Fixed premiums provide predictability.

Cons:

• Higher premiums compared to term life insurance.

• Less flexibility in adjusting coverage or premiums.

Universal Life Insurance

Universal life insurance is a flexible permanent policy that allows policyholders to adjust their premiums and death benefits. It includes a cash value component that grows based on market interest rates. This type of insurance is ideal for those who want the flexibility to adapt their coverage as their financial needs change.

Pros:

• Flexible premiums and death benefits.

• Potential for cash value growth based on market interest rates.

• Can adjust coverage as financial needs change.

Cons:

• Cash value and death benefit growth are not guaranteed.

• Premiums may increase over time.

Variable Life Insurance

Variable life insurance combines a death benefit with investment options. Policyholders can allocate their cash value to various investment accounts, such as stocks and bonds. This policy suits those with a higher risk tolerance who want to grow their cash value through investments.

Pros:

• Potential for significant cash value growth based on investment performance.

• Fixed premiums and guaranteed death benefit.

Cons:

• Requires active management of investment accounts.

• The cash value can fluctuate with market performance.

Burial Insurance

Burial insurance, also known as final expense insurance, is a small whole-life policy designed to cover funeral and burial costs. It is accessible to seniors and those with pre-existing health conditions, as it typically does not require a medical exam.

Pros:

• Guaranteed death benefit for funeral and burial expenses.

• No medical exam is required.

Cons:

• Low coverage amounts.

• May not pay the full death benefit if the insured dies within the first few years.

Figuring out how much life insurance coverage you need and which policy is best for you can feel daunting, and that's where you can benefit from the guidance of a professional financial advisor. They're there to guide you toward one that fits your life stage and financial goals and provides adequate coverage.

The True Cost of Life Insurance

One misconception about life insurance is how much it costs. A Forbes survey asked respondents to guess the cost of a 10-year, $500,000 term policy for a healthy 40-year-old. More than 80% thought the monthly cost ranged between $40 and $120. In reality, the cost would be just $20/month. 

Part of this pricing disconnect stems from not understanding how premiums are calculated. Did you know that factors such as age, health history, and even hobbies can impact your premiums? And yes, whether you smoke marijuana is in the mix. 

According to MarketWatch, the average monthly cost for a term life insurance policy with a $250,000 coverage amount is $22 for individuals aged 30, increases to $32 for those aged 40, and $80 for 50-year-old policyholders. Yet more than half of respondents in the Forbes survey had no idea that health history and age influence life insurance quotes.

Outside of health and age concerns, price is dependent on other factors like term length, how much coverage you need, your credit, etc. While the cost of a life insurance policy often reflects your priorities and the needs of those who depend on you, the true cost of life insurance is peace of mind.

Why You Shouldn't Go It Alone

Seeking professional advice is highly recommended when choosing a life insurance policy. Financial advisors can help you understand the options, assess your needs, and select the best policy so you don't have to scratch your head over the fine print. They will explain the types of policies life insurance companies offer and match them with what you need. Additionally, they can help you select life insurance beneficiaries to ensure your loved ones are taken care of.

An advisor will also break down the policy's death benefit, making sure it fits your family's future needs just right. With a financial advisor, you can trust that your life insurance isn't just a safety net but a well-thought-out plan for your family's well-being.

The Aligned Perspective: What is Life insurance and How can an Advisor Help?

Choosing the right life insurance company or coverage is a big decision. Whether you're covering college tuition, ensuring mortgage payments are met, or providing long-term resources for your loved ones, consider how life insurance can fortify your financial plan and carve out a legacy of care. With a trusted financial advisor by your side, forging through the maze of options, premiums, and coverage levels, you can find solace in the fact that you've taken a definitive step toward safeguarding your family.