Is life insurance worth it?

Life insurance can be an essential part of financial planning. The right policy can replace your income if you were to die suddenly or help you establish a financial legacy for your heirs.

But does life insurance make sense for everyone? Should you save on premiums and provide for your loved ones in other ways?

There are several factors to consider when deciding if life insurance is worth it.

In many cases, it's clear when life insurance is a good fit.

You have a family that depends on you

"If you were to pass away, people who depend on your income stream would no longer have that," says Carla Adams, cofounder of Ametrine Wealth.

Even a stay-at-home parent is a good candidate for a policy, Adams adds.

"If a stay-at-home parent were to pass away, the working spouse would probably need to hire a nanny, a cleaning person, someone to help around the house."

You have shared debts

While some debts can be paid off with your assets when you die, that's not always the case with jointly held debts, like a mortgage or car loan.

If paying the mortgage solo would be a burden for your partner, a life insurance policy could ensure they could stay in the house rather than downsize.

"Typically you want to alleviate some of those burdens so they can focus on building wealth or doing other things," says Jovan Johnson, cofounder of Piece of Wealth Planning in Atlanta.

You're responsible for someone with special needs

"Another time it would make sense to get insurance is when there's a disabled child or disabilities in general," Johnson said.

If this is your situation, a financial planner can help you decide on the best policy and how to ensure it will be the most useful for your family.

One common arrangement is a special needs trust, which allows them to continue receiving government disability benefits while having access to life insurance proceeds earmarked for their benefit.

You want to leave a financial legacy

If you have significant assets you want to pass along, permanent life insurance can let you do that without having to pay taxes on it or wait for it to clear the probate process.

"Maybe people want to leave some type of legacy, whether that's for their kids or donations to nonprofits," Johnson says.

Whole life and universal policies are guaranteed to pay out, so they're a better choice than a term policy to create a legacy.

"If I'm thinking about estate planning and transferring wealth to the next generation, I definitely want a policy that will outlive me," said ARI Financial founder Eric Bouskila.

You want to make sure your final expenses are covered

If you're a senior, a final expense policy (sometimes called burial insurance) can ensure that your funeral, burial/cremation, medical bills and other last expenses aren't left to your loved ones to deal with.

Final expense policies are small whole life plans that pay out between $10,000 and $30,000 and can often be obtained without a medical exam or health questions. The policies cost an average of between $30 and $70 per month, depending on your age and health.

We chose Mutual of Omaha's guaranteed whole life insurance as a top choice for burial insurance because of its affordability and generous payout — up to $25,000.

There are several situations where life insurance isn't a good investment.

You're on a budget

If a life insurance policy would put you in a bind financially, it probably isn't the right move. That's especially true of permanent life insurance, where premiums can run to several hundred dollars a month.

A term policy might be feasible if money is tight. But even that can add up over a 10-, 20- or 30-year term. If you miss payments, your policy could lapse and your beneficiaries would be left with nothing.

You're single with no children

If you don't have anyone depending on you financially, putting your money into long-term investments may make more sense than an insurance policy.

"When they can't even think of a beneficiary off the top of their head, often, that's a situation where life insurance isn't as pressing," said Johnson.

You're retired with plenty saved up

Another scenario where life insurance might not be worth it is if you're retired and well-situated financially. Empty nesters with grown kids might want to focus on estate planning or prepaying funeral costs.

Like all financial decisions, getting life insurance has its benefits and drawbacks.

The type of life insurance that suits you best depends on your budget, your goals and your life circumstances.

Term

Because coverage only stays in place for a set number of years, term life insurance is usually the most affordable type of policy: According to Policygenius, a term life policy for a 30-year-old in good health averages between $15 and $30 per month.

Most top providers will let you choose a term of between 10 and 30 years.

Getting a term life policy makes the most sense when you're in your prime earning years and have larger debts, like a mortgage or college tuition for a child.

"Usually these policies expire when people are in their 60s or 70s," Adams says.

If you're not high-net-worth, a term life policy can be a cost-effective way to protect your family while still having money to invest and build wealth.

"In theory, if you were to get a term policy and invest the rest in some diversified, passive ETFs or something like that, you could grow the money [that would have gone toward a permanent policy,]" said Johnson. "By the time your policy lapses, you'll have the assets and wealth to take care of yourself and pass down a legacy to your beneficiaries."

If you think term life insurance is for you, Bestow has policies with coverage up to $1.5 million available with just a few medical questions.

Permanent

A permanent life insurance policy stays in force as long as you continue paying premiums and your beneficiaries are essentially guaranteed a payout when you die.

Whole life insurance is the most common type of permanent policy: Premiums and death benefits are fixed and your plan builds cash value over time that you can withdraw, borrow against or use to pay your premiums.

With universal life insurance, however, the death benefit and premiums are adjustable, so you can make revisions as your income and budget change. These plans do generate cash value, but it's typically tied to interest rates or a market index and you can run the risk of being underfunded if you don't pay close attention.

We like MassMutual for whole life policies — the company has been around since 1851 and reliably paying dividends almost since then. It also has survivorship policies for couples, an increasingly rare option.

Pacific Life has a variety of universal life policies, including indexed and variable plans. Its high limits also make the brand ideal for high-net-worth individuals.

Since permanent life insurance is considerably more expensive — according to Policygenius, a whole life policy can average $400 a month — it may not be a good fit for everyone.

"Ultra-high net worth clients may want to use whole life insurance for estate planning," Adams says.

Depending on what your goals are, you may be able to achieve them without life insurance.

Save and invest on your own

If you're just looking to build wealth, a smart investment strategy will probably be more effective than permanent life insurance.

Buying a term life policy to cover your family during your peak earning years and investing what would otherwise go into whole life premiums will give you a better return. And be sure to max out tax-advantaged accounts like your IRA and 401(k).

Set aside savings for your funeral

If you want to take the burden of your final expenses off of your loved ones, consider putting aside funds to cover the arrangements you make with a funeral home. The Funeral Consumers Alliance advises against pre-paying for funerals, however, as many states don't have laws protecting consumers in these situations and your plan may not follow you if you move.

A Payable On Death account avoids the lengthy probate process and allows your beneficiaries to access funds quickly to cover funeral costs.

Buy another type of insurance

Other kinds of coverage can help your family during a difficult time:

• An accidental death and dismemberment plan can pay out if you lose a limb or die unexpectedly in a covered situation.
• Disability insurance can cover 50% to 70% of your income if you're unable to work. A long-term disability policy can remain in force for years (or even through retirement), while short-term disability coverage is better for situations where you eventually expect to return to work.
• Critical illness insurance can help with expenses if you experience a heart attack, stroke or other major medical condition.
• Long-term care insurance can be a financial cushion if you're no longer able to perform basic tasks of daily living, like eating, showering or going to the bathroom.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Carla Adams, a certified financial planner and the founder of Ametrine Wealth, in Lake Orion, Michigan. Adams has more than 15 years of experience in wealth management and focuses her practice on women and mid-career families.

We also spoke to Jovan Johnson, an Atlanta-based small business accountant, financial planner and the cofounder of Piece of Wealth Planning LLC.

Lastly, we interviewed Eric Bouskila, the founder of ARI Financial Group, a global financial firm focusing on high-net-worth individuals.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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