family hands life insurance basics

Life Insurance Basics: What Everyone Should Know

/27 Comments/in , , /by Mary Hunt

Life insurance isn’t exactly cocktail-party conversation, but it’s one of those “adulting” things we can’t afford to ignore. The truth? Most people are either paying way too much, don’t have enough coverage, or don’t understand what they’ve bought. I’ve been there (twice!) and learned some expensive lessons along the way. If you want the straight talk on what you really need and what to avoid, I’ve got you covered. No jargon, no sales pitch. Just the basics you’ll wish you knew sooner.

family hands life insurance basics

Not long ago, I received a message from one of my readers that sent a chill down my spine:

Dear Mary: Recently I switched my life insurance from term to whole life. Now I’m not sure I made the right choice. Which one is better? I am in my early 60s.

With so little to go on, I had to read between the lines. Here’s what I came up with:

This reader originally had a term life insurance policy. Then, probably after some “friendly advice” from a salesperson (or maybe even a well-meaning relative in the business), she was convinced to switch to whole life. The problem? She didn’t really understand what she was signing up for. Her very first question back to me was, “Which one is better?” That tells me this wasn’t her idea, and she didn’t have the knowledge she needed to make an informed decision.

Here’s the thing: life insurance decisions shouldn’t come from pressure, sales pitches, or “trust me, you’ll thank me later” promises. They need to come from understanding your own situation, goals, and responsibilities. If you’re confused the minute you sign the paperwork, or worse, doubting yourself as soon as the ink dries, that’s a big red flag.

I never heard back from this reader, but her story lit a fire under me to put together this list of things I believe every adult whether you’re in your 20s juggling student loans, in your 40s raising kids and paying off a mortgage, or in your 60s trying to protect your spouse, needs to know about life insurance.

1. Life Insurance Comes in Two Flavors

Think of life insurance like ice cream: there are two basic scoops to choose from: term and whole life.

Term insurance is the simple, straight-shooter. If you die while the policy is active, it pays your beneficiary the face value. No frills, no extras.

Whole life insurance, on the other hand, tries to be a combo meal. It blends insurance with an investment product, building up something called “cash value.” Sounds fancy, but here’s the thing: what you’re buying is already baked into the policy. You don’t get to tailor the investment side to fit your actual financial goals, which is where people can get tripped up.

And let me pause for a reality check: I’m not a CFP, a ChFC, or any other set of financial alphabet soup. I share what I’ve learned the hard way (yes, I’ve made not one but two big life insurance blunders). My goal is to help you sidestep those mistakes and make decisions based on knowledge, not pressure from a salesperson.

Bottom line: life insurance is too important to outsource to someone else’s commission check. Whether you’re juggling college tuition for kids or trying to protect a young family, understanding the basics puts you in the driver’s seat.

2. Insurance is Sold, Rarely Bought

Here’s the truth: most people don’t wake up one morning and think, “I should shop for whole life insurance today.” That’s because insurance, especially whole life, is usually sold to people, not sought out by them. The industry thrives on agents setting appointments, making pitches, and steering folks toward policies that earn high commissions (and high profits).

The problem? When an agent plays both teacher and salesperson, it creates a built-in conflict of interest. Are they guiding you toward what’s best for you, or what’s best for their paycheck?

Here’s how you protect yourself: separate advice from the sale. Never buy insurance from the same person who’s telling you what type and how much you need. Instead, educate yourself first, then go straight to a reputable company when you’re ready. That puts you in control, not on the defensive.

Bottom line: you’ll make smarter, more confident choices when you start the conversation, not the salesperson.

3. Whole Life Insurance is Expensive

Here’s the deal: whole life insurance costs a lot more than term, often many times more for the exact same coverage. And that price tag creates a big problem: people who buy whole life usually can’t afford enough coverage to truly protect their families. They end up with a policy that sounds impressive but leaves them underinsured and overpaying.

To make matters worse, many policyholders don’t really understand what they bought. Ask the average whole life owner about their policy’s cash value, investment performance, or even how to access information, and you’ll likely get a blank stare. What they do remember is the sales pitch: that someday, somehow, this policy will magically “pay for itself” and make them wealthy.

The reality is far less glamorous. Whole life can be complicated, expensive, and often leaves you paying more for less protection.

Bottom line: whole life may look shiny, but term insurance gives you more coverage for less money and frees up cash to actually invest in ways you understand and control.

4. Whole Life Policies are Built on Assumptions

Here’s something most agents won’t tell you: the “returns” they quote on whole life policies are not guarantees. They’re projections, estimates, or to put it bluntly, educated guesses. And if you’ve ever sat through a sales pitch, you already know those guesses tend to lean heavily to the optimistic side.

Why? Because a rosier projection makes the policy look more attractive and, in turn, boosts the agent’s commission. The problem is, those numbers rarely play out the way they’re presented.

Bottom line: when you hear “illustrated returns,” think “sales forecast,” not “guarantee.”

5. Keep Your Investments and Insurance Separate

Mixing insurance with investing is like mixing oil and water. It just doesn’t work the way salespeople want you to believe. Whole-life policies are structured to pay high commissions, not high returns, which means your money isn’t working nearly as hard as it could.

Here’s the smarter approach: buy as much term insurance as you can reasonably afford to protect your family, and then treat investing as its own lane. That way, your coverage does what it’s meant to do—provide protection—while your investments stay focused on growth and retirement.

Bottom line: Insurance is protection. Investing is growth. Keep them separate, and you’ll come out ahead.

6. Buy Enough Term Coverage to Fill your Needs

Term life insurance is no place to cut corners. While rates remain historically low, they’ve recently leveled off staying mostly stable over the past year. A common guideline is 8 to 10 times the annual gross income of the primary breadwinner, and 5 to 8 times for the secondary earner.

Here’s why that matters. Imagine a couple in their 30s with three young kids and two incomes. On the way home from work, the mother is tragically killed in a car accident. Half the family’s income is suddenly gone, but the bills haven’t disappeared.

The immediate expenses—funeral costs, medical bills, legal fees—are only the beginning. Day-to-day life doesn’t stop. The surviving parent still has to work, which means hiring help for childcare, cooking, cleaning, and the countless “invisible” roles their spouse once filled. And that’s before factoring in ongoing costs: school, sports, lessons, clothing, healthcare, holidays, vacations, and ultimately, college tuition.

This is the point of life insurance: not as an investment, not as a shiny financial product, but as a safety net that makes sure your family can continue living life without being financially devastated.

Bottom line: Life insurance’s only job is to protect your people. Buy enough term coverage so they won’t struggle if the unthinkable happens.

7. Match Term to Needs

A term life insurance policy should cover your dependents until they’re financially independent or until your retirement income can carry you through. Don’t just set it and forget it: shop your policy periodically to make sure you’re still getting the best rate. Term insurance is flexible, easy to adjust, and easy to cancel, so you’re not locked into a plan that no longer fits your life. Think of it like keeping your finances lean and responsive, the same way you handle other investments and major life decisions.

Bottom line: Choose a term that fits your real financial needs, review it regularly, and make adjustments as your life changes.

8. Buy When You’re Healthy

Life insurance is far cheaper when you’re young and healthy. The older you get or the more health issues you develop, the higher your rates climb. That’s why it pays to secure coverage sooner rather than later. But don’t rush: focus on buying insurance when you have real financial dependents, those who would struggle or be left financially destitute without your income. Remember, that’s the entire purpose of life insurance: protecting the people who rely on you most.

Bottom line: Lock in coverage while you’re healthy, and make sure it’s for those who truly depend on your income.

9. Tell the Truth

It might be tempting to stretch the truth on your application to snag a lower rate, but don’t. Insurance companies verify everything before paying claims. Any exaggeration or omission can void your policy when your loved ones need it most. Think of it as protecting the people who depend on you and avoiding a lifetime of headaches.

Bottom line: Honesty isn’t just the best policy. It’s the only way to make sure your coverage works when it counts.

10. Shop Online

Life insurance shopping has never been easier, thanks to the Internet. Once you know the type of coverage and the amount you need, you can pull up multiple quotes without ever dealing with a pushy salesperson. The key: do your homework first. Know exactly what you want, how much you need, and stick to your plan when comparing offers.

Bottom line: The online world gives you control. Use it to make confident, informed choices without the pressure.

11. GoFundMe is Not Life Insurance

You’ve probably seen or even donated to a GoFundMe fundraiser. It’s a platform to raise money for what matters to you, whether for an individual, a group, or an organization. Just set your goal, tell your story, and watch the donations roll in. Sounds simple, right?

And it is… sometimes. I’ve watched enough campaigns to notice a concerning pattern. Families, friends, and neighbors are turning to these platforms to cover burial costs, medical bills, childcare, or even pets’ medical expenses. Many of these stories are heartbreaking—young adults taken too soon, children suddenly orphaned. The authenticity is real, but the reliance on a crowdfunding site as a financial safety net is dangerous.

Here’s the reality: GoFundMe is not life insurance. It may feel like a backup plan, but it’s unreliable, unpredictable, and cannot replace proper coverage. Life insurance provides guaranteed, immediate funds when your loved ones need them most, something no fundraising page can promise.

Bottom line: Treat GoFundMe as a kindness, not a safety net. If you have people depending on your income, the only way to ensure they’re protected is through real, viable life insurance.

12. When Necessary, Life Insurance is Not Optional

Times are tough. Inflation has bulldozed through the typical American family budget, leaving everyone wondering which bills can wait. Life insurance premiums often feel optional or negotiable, especially when we’re young, healthy, and convinced we’ll “figure it out someday.”

Here’s the hard truth: if anyone in your life—spouse, minor child, elderly parent—depends on your income, life insurance is not optional. If your paychecks disappeared tomorrow, would your loved ones face financial ruin?

Still skeptical? Try this: for the next year, deposit your entire paycheck into a separate savings account and don’t touch it. Live as if that money never existed. A year from now, see how that worked out. If you and your dependents breezed through it, congratulations! You’ve unlocked a rare financial superpower. But if you felt the pinch, it’s time to take action.

Don’t wait. Start with term life insurance for the primary earners in your household. It’s the simplest, most reliable way to protect your family and give yourself peace of mind.

Bottom line: Life insurance isn’t a “nice-to-have.” It’s a must-have for anyone who supports others. Waiting only adds risk to people who depend on you.

 

Question: If something unexpected happened tomorrow, would your loved ones be financially protected or would they be passing around a GoFundMe link? Share in the comments below.

We invite your comments below; however, this is not the forum for life insurance professionals to debate, sell, or advise. Those messages should be directed to mailbag@everydaycheapskate.com

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27 replies
  1. Anne Pitts says:

    Hi Mary,
    The life insurance column made me wonder about Long Term Care Insurance. My husband and I bought Long Term Care Insurance in 2010 after my father and mother moved in with us. They had to sell their home of 38 years in order to pay for nursing home care for my father who had Parkinson’s disease. We were terrified we’d lose everything if we needed long term care. I’m 68 and he is 72 and in good health. Premiums are starting to skyrocket (now that we are close to retiring). We wanted to stop paying and just keep what we have in the policy for use in case we ever need it. Turns out you lose everything you paid in if you stop paying. If you pay slightly reduced premiums you keep what you’ve paid in but the terms change. It’s all very confusing. I’d love to read a column regarding Long Term Care Insurance.

    Reply
  2. Sandra says:

    Mary,
    So timely! We are looking into insurance for care when we are older and can’t live alone. We have a term life insurance policy that we got in the 80’s. I was thinking of canceling it to off set the cost of the extended care insurance. Now I understand we need to keep it. Thank you

    Reply
    • Mary Hunt says:

      Beverly, I hear you! It’s one of those things you wish someone had handed you a cheat sheet for years ago. I’m glad it’s helpful now!

      Reply
  4. Grandma Grace says:

    Dear Mary,
    Life insurance is in my opinion, a legal scam. It’s painted in rosy hues by the seller, but the fine print is
    never explained. Few of us are going to actually sit down and read through, much less comprehend the jargon utilized by these agents. Not life insurance, but my home owners’ insurer recently sent me notice that they were using my credit score to set my cost. No surprise, but what was a surprise was they aren’t using any of the three well known credit bureaus to determine my score. They have found someone else.
    Guess my “excellent” score with a well known agency just flew out the window.
    Wait for it….my rate went up.
    Who’d a thunk it? (is that phrase from Who’s Afraid of Virginia Wolff?)
    Anyhow, insurers get away with anything. We get to pay anything they feel like charging.

    Reply
  5. Jerry says:

    My life insurance company closed the policy after I turned retirement~! What is up with that? To take a policy in your late 60’s, all you can get, or afford, is a $10K policy that will work toward bearing cost.

    Reply
  6. mark says:

    We bought whole life insuance when we were young. now we are in our 60’s. The insurance co. has sent notices that the policy is now losing value…they needed to increase the price or it will be worthless when one of us dies. They are so confusing to talk to and we have not made any changes. I’m afraid we wont get enough when that time comes. It was sold on the premis that the price will never go up, no one ever said the value would go down. I asked them about the TV adds like Colonial pen(I think) have term policies for cheap…my agent said that is just a scam basically. Any thoughts?

    Reply
  7. Brian says:

    Hi Mary! You mentioned making two major life insurance mistakes. Please help us learn and tell us what those mistakes were, and what you would do differently now that you know better. Thank you! Love your website!

    Reply
  8. Veronica says:

    Hi Mary,

    I’d like to point out one benefit of my Universal Life policy, which builds a cash value like you described for Whole Life. During the crash of 2008, I was laid off and with job prospects slim, I decided to go back to grad school to move into a more age-friendly profession. While in school, I did gig work in my old field, but my income took a huge cut. In talking with my insurance agent, she told me that I could use that cash value to keep up bare-minimum payments to keep the policy in force for my young son. Once I started working full-time again, I resumed payments — at a monthly premium that I was allowed to choose for myself. I bought that policy when I was pregnant and still young and healthy, so my premiums are so low compared with comparable term policies I would be eligible for now. For me, there was such relief and gratitude that this company and this policy enabled me to take a couple years’ time-out from paying premiums, while keeping this policy in force.

    Reply
    • Mary Hunt says:

      Yours is an interesting story, Veronica! However, it is very unique and a situation that the general public should ever look to as a reason to purchase a whole life policy. I stand on this post. Even if you feel you can afford a whole life policy (in your case, “universal”) buy a much cheaper term insurance policy, and then invest the rest.

      Reply
  10. MaryAnn says:

    My only slight change in perspective on term life insurance concerns the untimely death of a spouse. My husband and I have had life insurance since the 80’s when we started our family. Our kids are all grown now and doing fine.
    However, at the age of 66, my husband very suddenly and unexpectedly passed away. Even though we are both retired and taking social security, I think what people don’t realize is that basically our Social Security income was cut in half after my husband died and will never be replaced so our annual income took a huge hit. On top of that, the funeral expenses (definitely unplanned in our 60’s) were almost $18K.
    Although we have retirement savings, I don’t think people realize that, although life insurance is not replacing “earned” income, it does come in very handy in a situation like ours.

    Reply
    • Mary Hunt says:

      Your situation certainly fits the criteria to have life insurance, and outlined in the post. Without his SS income, you would have found yourself yourself financially destitute, and likewise he without your SS income. The test does not preclude that income be “earned” even though I would argue that SS benefits check have been “earned!” They are not a gift… it’s money you earned that has been held and managed by the government. As for insurance money coming in handy, yes that’s true. But at what cost? If the insurance premiums are thousands a year (they certainly can be), saving that money instead of sending it to the insurance company make a lot of sense. Thanks for sharing MaryAnn.

      Reply
      • Vicki Tavana says:

        My best friend and I were in a similar situation. We shared our income and expenses to be able to afford our apartment and living expenses without having to watch every penny. Neither of us had insurance. When she died, being many years older than me, we didn’t have enough money between us and her family to bury or even have her cremated and have a viewing. (Cremation by itself was over $1100) I ended up having to move to a cheap long term hotel because I couldn’t afford to stay where we were. A good reason for having insurance

    • Mary Hunt says:

      Not sure there are any tax implications, Red. However, you could be sitting on cash value. I suggest you speak with a trusted insurance professional. Also, it’s easy to find out the exact cash value … just call the company. They will tell you how much you would receive in cash should you decide to cash out. You may decide that cash is better served under your management rather than the insurance company’s

      Reply
      • Ann says:

        If you surrender a life insurance policy, the difference between the surrender value and the cost basis (how much you’ve paid in) can be taxable.

  12. Denise Claire Cedras says:

    Mary,
    It’s important to read through the fine print on a term policy. I was stunned when I was billed for nearly double the quarterly amount & discovered that in certain years the premium rises! And now that I am looking at retirement within the next year & a limited income, it has risen again. I’ve kept the policy so that my kids will not have to foot the bill for my funeral. I have researched for lower coverage, but at my age a policy for a lower amount is the same or higher cost! than my current coverage. (And, due to life circumstances I do not have a retirement plan or part of a nest egg that I can set aside for the funeral expenses.)

    Reply
  13. Maria L. Bunker says:

    Thanks Mary; you made that so clear and I now know that I do not need life insurance. Should I do a pre-pay on funeral arrangements; since that is the only reason I can think of for my children to be burdened with if I die?

    Reply
    • Mary Hunt says:

      Prepaying your final arrangements is certainly an option. Or open a joint account for those funds with your chosen executor or family members(s).

      Reply
  14. Lucy says:

    Hi Mary! Could you please expand on #7 a little (7. Match the term of the policy to your needs
    You want the policy to last as long as it takes for your dependents to leave the nest or for your retirement income to kick in.) I have no dependents, but I still have term life insurance (to pay off my house if I die before it’s paid off). Other than my house, I have no debt. Thanks!

    Reply
    • Mary Hunt says:

      Hi Lucy: There is only one reason to carry life insurance and here it is: To replace your income for those whose livelihood would disappear upon your death. Specifically, that would be minor children, a spouse who depends on your income, perhaps elderly parents you support financially who are so dependent that without your financial support and would become financially destitute if that income were to disappear. Given you have no dependents who depend on your income for their livelihood, I see no reason for you to have life insurance. And unless the policy is actually “mortgage insurance” required by the mortgage holder where it is the beneficiary of that policy should you die before the mortgage loan is paid off, in my opinion, that is not a good reason for you to carry life insurance, either.

      Reply
      • Vicki Tavana says:

        The reason my son and daughter- in- law have given me for having at least a term policy is to have enough to bury me when I die. My ex- husband recently died and although we”KNOW” he has insurance we couldn’t find the policy/ies so it ended up costing around $18,000 for the funeral, viewing and burial. That had to come out of their pockets since they couldn’t find the policy

  15. Joy Thomas says:

    Thanks Mary! We bought term life insurance in our late 20’s and it will expire (what is the right word?) in a decade or so when we are in our 50’s. What then? Should we wait until then and purchase a new term policy or purchase a longer policy now when we are a little younger?

    Reply
    • Mary Hunt says:

      Have you determined why you will need life insurance after this policy expires? It sounds to me as if you purchased that policy to cover the years you have minor children and perhaps a double income—both spouses working. It makes sense to carry life insurance then as losing one of those incomes permanently could throw a family into quite a financial tailspin. I can’t really advise you beyond that as I have no specifics about your situation, nor am I licensed to give specific financial advice. But you can learn so much through your own independent research. Just make sure you are learning from someone who will NOT benefit financially should you act on his or her advice. Learn, determine your need and then go shopping.

      Reply
    • Mary Hunt says:

      Assuming you have determined you need life insurance, as spelled out in the post, I would be shopping it every year! Compare premiums. Chances are pretty good you can get the same coverage (face value) now for lower premiums.

      Canceling your term policy couldn’t be easier: just stop paying your premium and write a letter or call your insurer to let them know you are canceling the policy. Check the website of your insurer, too — there may be a form there you can fill out to terminate your policy.

      Caution: NEVER cancel any kind of insurance before the replacement policy is in place. Even that means a month of double coverage, never set yourselves up for an insurance gap!

      Reply

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