What is Life Insurance? A CFP®'s Guide to Protecting the People You Love

Understanding Coverage, Costs, and How to Protect Your Family's Financial Future.

Life insurance is one of the most misunderstood financial products available today. Some people assume it’s too expensive. Others believe the coverage they receive through work is enough. Many single people and stay-at-home parents don’t think they need it at all.

As both a CFP® professional and independent life insurance broker, I’ve found that most people don’t fully understand what life insurance is, how it works, or how much protection their family actually needs.

The good news? Life insurance is often more affordable and more accessible than people realize.

In this article, I discuss what life insurance is and the importance of having this protection. I also explain the underwriting process, how carriers determine premium rates, and more.

What Is Life Insurance?

Life insurance is a contract between you and a life insurance company. In exchange for premium payments, the insurance company agrees to pay a tax-free death benefit to your beneficiaries if you pass away while the policy is in force. That is how life insurance works. Here is a simple example. Bob has $1,000,000 life insurance policy. He passes away while the policy is in force. His surviving spouse, Lisa, receives the $1,000,000 death benefit. 

Simply put, life insurance helps ensure that the people you care about are financially protected if something unfortunate happens to you. It is a financial safety net.

The death benefit money can be used for:

• Replacing lost income
• Paying off a mortgage or continuing mortgage payments
• Covering childcare expenses
• Funding a college education and other education expenses
• Paying off debts
• Handling final expenses and funeral costs, such as burial plots, burial costs, wake services, and other related costs.
• Maintaining your family’s standard of living

Life insurance is ultimately about protecting the people who depend on you.

Who Needs Life Insurance?

One of the biggest misconceptions I hear is that life insurance is only for certain groups of people.

In reality, life insurance can benefit:

• Young families
• Newly married couples
• Business owners
• High-income professionals
• Stay-at-home parents
• Single parents
• Pre-retirees
• Single people (even those with no dependents)
• Anyone with financial obligations or dependents

If someone would experience a financial hardship because of your death, there’s a good chance life insurance should be part of your financial plan.

How Much Does Life Insurance Cost?

The cost of life insurance is a function of many variables, including, but not limited to:

• your age
• your gender
• how much coverage you want
• your medical history and how healthy you are
• the type of policy (term life, whole life, universal life)
• lifestyle factors such as tobacco, marijuana use 
• hazardous activities such as skydiving, rock climbing, or hazardous occupations such as oil riggers
• driving record
• bankruptcy / credit history
• if you have a criminal record or felony history
• anything else the underwriter deems material to your application

When you submit a life insurance application, the application goes to an underwriter. The purpose of the underwriting process is to determine if your application is an acceptable risk. If it is, the underwriter approves the application. If not, the underwriter declines it. The underwriter reviews all of these factors above, and then he or she determines your monthly premium.

Underwriters also use the following information to help them determine your rate:

• a medical exam (called a paramedical exam)
• your medical records
• two important databases called the MIB and Milliman Intelliscript
• public records (driving, criminal records, court records, etc.)
• ​anything else the underwriter deems material to your application

If you would like an idea on how much a term life insurance policy will cost on you, feel free to contact us or use the quoter below.

How Much Life Insurance Coverage Do I Need?

One of the most common questions I hear from clients is, “How much life insurance do I really need?” The answer is different for everyone because life insurance is not simply about replacing income—it's about protecting the people who depend on you and ensuring that your financial goals can still be achieved even if you're no longer here.

As both an insurance broker and a Certified Financial Planner™ (CFP®) professional, I believe that determining the right amount of life insurance requires a comprehensive evaluation of your financial picture, family situation, future goals, and existing assets. While online calculators can provide a rough estimate, a personalized analysis often leads to a much more accurate and effective solution.

It's important that you know how much life insurance you need. I dedicate more time in this article on this subject.

Start with Your Financial Obligations

The first step is to identify the financial responsibilities your loved ones would face if you were to pass away unexpectedly. These may include:

• Mortgage balance and other outstanding debts
• Ongoing household expenses
• Children's education costs
• Final expenses and funeral costs
• Income replacement for a surviving spouse or family
• Business obligations or succession needs

Life insurance should help provide financial stability during what would already be a difficult emotional time.

Rule of Thumb Method

A common rule of thumb suggests purchasing coverage equal to 10 to 15 times your annual income. However, this approach often overlooks important factors such as your age, retirement savings, investment assets, and future income potential.

From a financial planning perspective, I prefer to more accurate methods. Another method is to calculate how much capital would be needed to generate income for your family over a specific period of time. For example, if your family would need $100,000 annually for 20 years, the required coverage may be significantly different than a simple multiple of income would suggest.

A More Accurate Method: The Asset Factor

Life insurance needs should not be calculated in isolation by using a multiple factor like 10 X income. A more accurate method incorporates your existing assets such as:

• Retirement accounts
• Investment portfolios
• Savings and emergency funds
• Employer-provided life insurance
• Existing personal life insurance policies

These assets may reduce the amount of additional coverage required. However, it's important not to rely too heavily on employer-sponsored coverage, as those benefits are often tied to your employment and may not be portable.

Add In Future Goals

Many families want life insurance to do more than simply pay bills. It can also help fund important goals such as:

• College education for children
• Retirement security for a surviving spouse
• Care for a special-needs dependent
• Family legacy or wealth transfer objectives
• Charitable giving goals

A well-designed life insurance strategy should align with your broader financial plan and long-term objectives.

A Simple Life Insurance Needs Framework

Putting it all together, one practical method is to put together what you want the death benefit money to do while removing existing asset resources.

What You Want the Death Benefit To Do

Pay off outstanding debts

Mortgage payoff

Fund future education costs

Income replacement

Final expenses

Minus Existing Resources

Savings and investments

Retirement accounts

Existing life insurance

Other available assets

The difference is often a good starting point for determining the appropriate amount of coverage. We developed our own life insurance needs worksheet in PDF format. Feel free to download it and contact us if you have any questions.

Review Your Coverage Regularly

Life insurance is not a "set it and forget it" decision. Major life events such as marriage, divorce, the birth of a child, purchasing a home, changing jobs, or approaching retirement can significantly impact your insurance needs.

I recommend reviewing your life insurance coverage at least every few years, or whenever a major life change occurs, to ensure your protection remains aligned with your current financial situation.

Common Life Insurance Myths

I’ve been doing this for a long time, and I’ve heard many life insurance myths. Here are some of the most common ones.

Myth #1: Life Insurance Is Too Expensive

This is the most common misconception I encounter.

Many people assume life insurance costs hundreds of dollars per month. In reality, healthy individuals can often obtain substantial coverage for far less than they expect.

For example, a $1,000,000, 30-year traditional term life policy for a 30-year-old woman in good health may cost around $40 to $50 per month, depending on the carrier. Feel free to search for life insurance quotes on your own below.

That works out to about $1.50 per day.

Moreover, even if you have to pay a higher amount (called a table rating) because of a health condition, hazardous activity (e.g., skydiving), or lifestyle situation, the price may still remain affordable.

Many of my clients delayed purchasing coverage for years because they assumed it would be cost-prohibitive. After reviewing their specific situation, they were often surprised by the price.

The bigger risk is waiting. The best time to purchase life insurance is right now. You are the youngest you will ever be, and you are probably in the best shape you will ever be in.

Myth #2: My Coverage Through Work Is Enough

Employer-provided life insurance is a great benefit, but it’s often insufficient.

You see, employer-group coverage is designed to be basic and plain vanilla. It’s not designed to meet an employee’s specific needs. That’s what an individual life insurance plan is for. Employers often cap the amount or set it at a multiple of salary to keep things basic and keep costs low.

One client I worked with believed he was fully protected because he had $100,000 in employer-sponsored life insurance. That death benefit would only last his surviving spouse and kids for 8 months. After reviewing his financial situation, we calculated that his family would likely need significantly more protection if he passed away.

The best part? The additional coverage was far less expensive than he expected. See the section above.

Finally, employer coverage also has another limitation: it typically stays with your employer. If you change jobs or lose your job, your coverage may be discontinued. In other words, you can’t take that policy with you. It’s not portable.

Myth #3: I Don’t Work, So I Don’t Need Life Insurance

Many stay-at-home spouses and parents underestimate the economic value they provide. Many economic and occupational websites suggest that stay-at-home parents earn an equivalent of $100,000 or more. 

Consider what would happen if a stay-at-home parent passed away. The surviving spouse might suddenly need to pay for:

• Childcare
• Transportation
• Housekeeping
• Meal preparation
• After-school care

These services can cost tens of thousands of dollars per year.

Even if you don’t earn a paycheck, your contribution to the household has significant financial value. Make sure you get the life insurance you need that protects your family. Many life insurance carriers allow the stay-at-home spouse life insurance based on the working spouse's income.

Myth #4: I Already Have Enough Coverage

Many people purchased coverage years ago and haven’t revisited it since.

Life changes.

You may have:

• Bought a home
• Had children
• Started a business
• Increased your income
• Gotten divorced
• Taken on additional financial responsibilities

A policy that was adequate five years ago may no longer meet your family’s needs today.

Myth #5: I'm Single With No Dependents, So I Don't Need Life Insurance

Many people assume life insurance is only for married couples or parents with young children. While those groups often have a clear need for coverage, being single and child-free doesn't automatically mean life insurance has no value.

The reality is that even single people with no children or dependents need life insurance.

Even if no one relies on your income today, there may still be financial responsibilities that would remain if you passed away unexpectedly.

Some examples include:

• Outstanding debts that have a co-signer, such as student loans, personal loans, or a mortgage.
• Funeral and final expenses, which can cost several thousand dollars and may otherwise be paid by family members.
• Support for aging parents if you currently help them financially or expect to in the future.
• Future insurability concerns, since purchasing coverage while young and healthy may allow you to lock in lower rates.
• Leaving a legacy, such as providing money to siblings, nieces and nephews, a favorite charity, church, or community organization.

Additionally, new types of life insurance exist on the market today which could prove beneficial for single individuals. These new types of life insurance contain additional benefits including, but not limited to:

• living benefits - which allow the insured to advance the death benefit sooner for covered event. Covered events typically include a severe illness such as cancer or a stroke as well as needing custodial care (i.e., long-term care)
• long-term care - many new types include a long-term care rider for possible long-term care needs
• cash value - while not new, many new whole life and universal life insurance policies offer enhanced cash value options.
  

Here’s Why Buying Life Insurance Early Matters

If there’s one piece of advice I could give everyone, it’s this: Buy life insurance as soon as possible.

Life insurance premiums are generally based on your age and health. As you get older, costs typically increase. Health conditions can also limit your options or make coverage more expensive.

You could save thousands of dollars over your lifetime with this easy strategy. 

Let’s use my 30-year-old woman as an example. Her $1,000,000, 30-year term costs $40 per month. Let’s say she waits until she is 40 to buy her $1,000,000. She only needs a 20-year term because she is now 40, and a shorter term usually saves money. However, that assumes your health hasn’t changed. Let’s say her BMI changed over the last 10 years because she had a few children. Her health status went from very healthy at age 30 to a standard health rate at age 40. That's still OK. However, a $1,000,000, 20-year term at standard health may now cost $80 per month. 

If she applied at age 30, she would have paid $14,400 in premiums over the 30-year term ($40 per month X 12 months X 30 years). Instead, she pays $19,200 over the 20-year term due to the increase in her BMI ($80 per month × 12 months × 20 years). So, in this basic example, she pays $4,800 more over her lifetime by waiting.

So, the moral of the story is to apply as soon as you can.

I’ve seen many people postpone purchasing life insurance because they assumed they had time.

The younger and healthier you are when you apply, the more options you’ll generally have available.

Real-Life Life Insurance Success Stories

Every situation is unique, which is why working with an experienced life insurance broker can make such a difference. Here are some real situations where we have helped people obtain life insurance. 

Protecting an Entire Family

One of my favorite cases involved helping a husband and wife obtain coverage for themselves and their three children.

The goal wasn’t just to insure one individual—it was to create a comprehensive protection strategy for the entire family. Knowing that everyone was covered provided peace of mind beyond the policy itself.

Additionally, before you hear otherwise, it is possible to obtain term life insurance on children on their own policy. You just need to work with an experienced broker who knows where to look.

Helping a Client With Bipolar Disorder Secure $3 Million of Coverage

I worked with a client who had bipolar disorder and had been declined multiple times by other insurance companies.

After evaluating the marketplace and identifying the right carrier, we secured a $3,000,000 term life insurance policy for him.

Many people assume a health condition automatically disqualifies them from getting coverage. That’s often not the case. 

Helping Someone With a Felony History

Another client believed their felony record would prevent them from obtaining life insurance.

By understanding which insurance companies were willing to consider their circumstances, we were able to secure a $500,000 term life policy.

This is a perfect example of why working with an independent agent matters. Different insurance companies evaluate risk differently.

Closing a Life Insurance Coverage Gap

As mentioned earlier, one client thought his $100,000 employer benefit was sufficient.

After conducting a thorough review, we identified a significant coverage gap and found an affordable solution that better protected his family.

The client was astounded when he took a step back and realized his $100,000 wouldn’t last 8 months for his surviving wife and kids. 

We put in place an affordable life insurance plan. We also established coverage on his stay-at-home spouse in case she unexpectedly passed away.

Why Life Insurance is a Brick in the Foundation of Financial Planning

Many financial commentators and advisors like to begin the financial planning conversation with retirement strategies, savings plans, 401(k)s, Roth IRAs, and other investment vehicles.

While those topics are important, they often assume you have something else in place first: insurance protection in case your financial plan goes off the rails.

And financial plans do go off the rails—sometimes because there wasn't enough insurance protection to begin with.

When I talk about protection, I am specifically referring to life insurance and the often-overlooked but critically important disability insurance. Home and auto insurance certainly matter, but life and disability insurance protect something even more valuable: your ability to provide for yourself and your family. These policies pay a financial benefit when an insured person dies or becomes disabled.

Think of your financial assets as a home. Your investments, retirement accounts, and savings make up the walls, roof, and everything inside. But what happens if you build that home without a solid foundation? Eventually, it may begin to crack or even collapse.

The same is true of a financial plan. Assets such as a 401(k) or investment portfolio can be severely impacted by an unexpected death, injury, or illness.

Fortunately, they don't have to be.

Insurance serves as the foundation of a sound financial plan. Life insurance is one brick in that foundation. Disability insurance is another. Health insurance and various supplemental coverage options also play important roles. Together, these protections help safeguard your investments, savings, and long-term financial goals against the unexpected.

The Different Types of Life Insurance Policies: Term Life vs. Permanent Life Insurance

This is one of the most debated topics in financial planning. Which is better: term life insurance or permanent life insurance?

In my experience, there is no universal answer.

The right solution depends on your goals, budget, and overall financial plan.

Term life insurance policies last for a fixed or set number of years. This fixed period is the term period where premiums remain level. After the term period expires, the insured-owner has a choice: cancel the policy or continue it; however, if he or she continues, premiums increase each year.

Term is the lowest-cost life insurance for $1,000 of coverage. Agents and advisors sometimes refer term life policies as temporary protection because they protect you for a temporary period. (i.e., 20 years, 30 years, etc.)

Permanent life insurance is designed to last your entire lifetime. The most common forms of permanent life insurance are whole life and universal life.

Permanent life insurance contains cash value. Cash value is kind of like a savings account (but it isn’t). Cash value is outside the scope of this article, but it is the reason premiums remain level for the lifetime of a whole life policy. (Universal life is different in its structure and can have varying premiums.)

People who purchase whole life or universal life do so for life insurance coverage, but also to take advantage of the cash value. The cash value grows tax-deferred and can be borrowed tax-free. Many strategies can be used with the cash value.

Term life has strategies as well. One strategy I believe deserves more attention is term laddering.

Term laddering involves purchasing multiple term policies with different durations to match specific financial obligations. For many families, this can provide appropriate protection at a lower overall cost.

I also believe that the phrase “buy term and invest the difference” can absolutely work—provided you consistently invest the savings rather than simply spend them.

The key is having a strategy and following through.

If you would like to learn more about term life, permanent life, or any life insurance strategies, please contact us.

Riders: What Most People Don’t Realize About Life Insurance

One challenge I often see is agents recommending unnecessary riders that increase costs without delivering meaningful value.

Riders are options that customize a policy. For example, one common rider that many life insurance carriers offer is the waiver of premium. Upon disability, the carrier will waive your life insurance premium after a waiting period. 

Some agents automatically include this rider, but it can be costly. Moreover, better alternatives may exist for your situation.

While riders can be beneficial in certain situations, they shouldn’t simply be added by default.

Remember that every rider recommendation should be based on your actual needs, not a sales quota.

Life insurance should be customized to fit your family, your goals, and your financial situation.

Why Working With an Independent Agent Matters

Not all life insurance shopping experiences are the same.

This isn't a section to harp on captive agents. Many fantastic captive agents exist; however, they are employees of the insurance company. They work with one insurance carrier and have one solution.

As an independent agent, I have access to more than 50 life insurance companies rather than being limited to a single carrier’s products. And...many solutions...

That gives my clients several advantages:

• More competitive pricing
• More underwriting options
• Better solutions for health conditions
• Better solutions for unique lifestyle situations
• Greater flexibility when designing coverage

My CFP® background also allows me to approach life insurance from a financial planning perspective rather than simply focusing on selling a policy.

I believe life insurance should fit into your broader financial plan and serve your family’s long-term goals.

Most importantly, I strive to be a trusted resource and friend—not a salesperson. My goal is to educate first, help you understand your options, and guide you toward the decision that makes the most sense for you.

Final Thoughts About Life Insurance

I hope you enjoyed this article and educated yourself about life insurance. 

We answered the question of what life insurance is. We also discussed who needs it, cost, underwriting, myths, and the different types.

However, the main point of this article, "What is Life Insurance," isn’t really about insurance.

It’s about protecting your spouse, your children, your business, and the people who count on you most.

Whether you’re a young parent, a business owner, a stay-at-home spouse, or someone who simply wants to leave their family in a strong financial position, life insurance can be one of the most important financial decisions you’ll ever make.

If you’re unsure whether your current coverage is adequate, have been declined in the past, or would simply like a second opinion, I’d be happy to help.

Sometimes the biggest surprise isn’t how much life insurance costs—it’s how affordable the right protection can be. Contact us. We would be happy to help