Life Insurance Basics: What You Need, How Much, and What to Buy
Life insurance is one of those topics most people avoid until something forces them to think about it. The industry makes it confusing on purpose — more complexity means more products to sell. But the fundamentals are straightforward once you cut through the noise.
Do You Actually Need Life Insurance?
Life insurance replaces your income if you die. That's it. You need it if other people depend on your income to pay their bills.
If you're single with no dependents, you probably don't need it at all. If you have children, a spouse who would struggle financially without your income, or a mortgage your partner couldn't cover alone, you likely need coverage.
If your children are grown and financially independent, and you've built up enough savings and retirement accounts, you may no longer need it even if you once did.
Term vs. Whole Life Insurance
This is the most important decision. The industry pushes whole life insurance aggressively because it's far more profitable for them. Most financial experts recommend term life for nearly everyone.
Term Life Insurance
Term life covers you for a specific period — 10, 20, or 30 years. If you die during the term, your beneficiaries receive the death benefit. If you don't, the policy expires with no payout.
Pros:
- Dramatically cheaper than whole life for the same coverage
- Simple and transparent
- Right-sizes to your actual need (you need coverage while dependents are young and your savings are still growing)
Cons:
- No "cash value" component (which is largely a feature, not a bug — more on this below)
- You might outlive the policy
A healthy 30-year-old can get a $500,000, 20-year term policy for $25-35 per month.
Whole Life Insurance
Whole life covers you for your entire life and includes a "cash value" component that grows over time. Part of your premium builds savings you can borrow against.
Pros:
- Permanent coverage
- Guaranteed death benefit regardless of when you die
Cons:
- Costs 5-15x more than term life for the same coverage amount
- Cash value grows slowly and at low rates compared to investing the premium difference in index funds
- Extremely profitable for agents who sell it (hence why it gets pushed so hard)
The "buy term, invest the difference" strategy is well-established: buy cheap term insurance for the coverage you need, and put the money you're saving compared to whole life into index funds. Over 20-30 years, you'll almost certainly come out far ahead.
Universal Life, Variable Life, and Others
These are variations on whole life with different savings/investment components. They're generally even more complex and even more expensive. Unless you have a very specific tax or estate planning need, skip them.
How Much Coverage Do You Need?
Several common approaches:
10x income rule: Buy 10 times your annual income. If you earn $70,000, buy $700,000 in coverage. Simple, but rough.
DIME method: Add up:
- Debt: All outstanding debts (mortgage, car loan, student loans, credit cards)
- Income: Your annual income × the number of years until your youngest child is independent
- Mortgage: What's left to pay off (if not included in debt)
- Education: Estimated college costs for all children
Needs-based approach: Calculate exactly what your family would need to maintain their current lifestyle without your income. Include mortgage payments, childcare, healthcare, living expenses, and future college costs. Subtract any savings and assets your family could draw from.
For most people with young children, $500,000-$1,000,000 in coverage for 20-25 years covers the essential need.
Where to Buy Term Life Insurance
Comparison shopping is easy and free. Start with:
- Policygenius — independent comparison tool, no pressure
- Haven Life — backed by MassMutual, fully online application
- Ladder — flexible coverage that decreases as your needs change
- SelectQuote — compares multiple insurers
Most 20-40 year olds in good health can get coverage quickly without a medical exam (policies up to $1-3 million often use algorithmic underwriting). You'll answer health questions and may give permission to check your prescription history and medical records.
The Medical Exam Question
For larger policies, insurers may require a paramedical exam — a nurse comes to your home and takes blood pressure, collects a blood sample, etc. It's free and usually takes 30 minutes.
If you're in good health, an exam often results in better rates. If you have health conditions, no-exam policies exist but tend to cost more.
What Makes Your Rate Go Up
Life insurance pricing is based on your probability of dying during the coverage period. Factors that increase cost:
- Age (each year you wait costs more — don't delay)
- Smoking (often 2-3x the premium)
- Obesity
- Pre-existing conditions (diabetes, heart disease, cancer history)
- Dangerous hobbies (skydiving, private pilot license)
- Driving record (DUIs significantly raise rates)
When to Review Your Coverage
Life insurance needs change. Reassess when:
- You have a child
- You buy a house
- Your income increases significantly
- Your children become financially independent
- You accumulate enough savings that your family would be financially secure without your income
Common Mistakes to Avoid
Buying too little: The cheapest 20-year policy with $250,000 coverage might not cover your mortgage and provide for your kids. Don't underinsure to save $10/month.
Buying through your employer and stopping there: Employer group life insurance (usually 1-2x salary) is rarely enough. It also disappears if you leave the job.
Waiting too long: Life insurance gets more expensive as you age. Every year you wait costs more, and a health event can make you uninsurable or dramatically increase your rates.
Buying whole life you don't need: If an agent is pushing you toward whole life, ask them to show you the same death benefit in term life and calculate the premium difference. Then ask what your returns would be if you invested that difference.
The Bottom Line
For most people under 50 with dependents: buy a 20-25 year level term policy for 10-12x your annual income from a highly rated insurer. Shop at least 3-4 companies. Get it done in an hour online. Done.
Life insurance is one of the least complicated personal finance decisions once you strip away the sales complexity.