Jesse Smedley is a Principal of Oakbridge Insurance and the founder of iHealthBrokers. He founded iHealthBrokers in 2007, and Oakbridge acquired iHealthBrokers in 2025. He has spent nearly two decades teaching people how to save money on their health insurance and navigate Medicare, and he is the author of Medicare A to Z: Your Roadmap to Medicare.
Like any other type of insurance, life insurance is an agreement between you and an insurance company. You pay a premium, and in return, the company agrees to pay out if a certain event happens. With life insurance, if you pass away while your policy is in force, the insurance company pays a lump sum to the people you named.
That lump sum is called the death benefit. Remember, life insurance isn’t for the person who buys it. It’s for the people you love and leave behind, and it’s the final gift you can give them.
Because it’s paid as a lump sum, the money can be used for almost anything: day-to-day living expenses, college tuition, debt, a mortgage and more.
Types of Life Insurance
There are two main types of life insurance: term and permanent. Both are aptly named.
Term Life Insurance
Term life insurance covers you for a set period, usually 10, 20 or 30 years. It’s mainly meant to replace your income or protect against debt during your peak earning years, before retirement. It’s generally much cheaper than permanent life insurance.
The catch is that it only pays out if you die during the term, and it has no cash value.
Permanent Life Insurance
Permanent life insurance stays in effect for your entire life, as long as you keep paying the premiums.
It costs more, but it includes a cash value component that grows over time. You can borrow against that cash value or cash it out, although loans and withdrawals you don’t repay reduce the death benefit. Permanent life insurance is often used for estate planning, long-term financial strategies or lifelong coverage.
Term life insurance is simpler and easier to understand. Permanent policies tend to be more complex, with more fine print. That’s a big reason most people choose term life insurance.
Who Needs Life Insurance?
Not everyone needs life insurance. We recommend it for:
- Parents of minor children
- Homeowners with a mortgage
- Couples where one person earns most of the income
- Business owners
- People who care for aging parents
It’s usually not necessary for single people with no dependents or retirees with enough savings. And children and teens probably don’t need it yet. If you’re planning for retirement, our retirement planning tips can help you see where you stand.
How Much Life Insurance Do You Need?
Start by identifying your goals.
Are you mainly trying to replace your income or cover final expenses? Then term insurance is probably the right fit.
Do you want to leave a legacy? Then permanent life insurance may be worth considering.
Once you know your goal, figure out how much coverage you need. Two common ways to estimate it:
- The DIME method: Add up your Debt, Income replacement needs, Mortgage balance and your children’s Education costs.
- The income multiple: A common rule of thumb is 10 to 15 times your annual income.
Either way, factor in your savings, your spouse’s income and any life insurance you already have through work.
Then compare plans and quotes. Online marketplaces are a good place to start, but we highly recommend working with a licensed insurance broker.
How Life Insurance Works
Once you’ve chosen the type of policy, the company and the amount, your application goes through underwriting. The insurance company looks at your age, health, lifestyle and overall risk. An older person with health issues will usually pay more than a younger person who practically lives at the gym. And if you’re a frequent skydiver, you may pay a bit more too.
You may also need a medical exam, and your premium will reflect your health.
Once you’re approved, the policy goes into effect. If you die while it’s active, your beneficiary files a claim and receives the death benefit. In most cases, the death benefit isn’t taxable income for your beneficiary.
Mistakes to Avoid
- Buying too little coverage. Term life insurance is often more affordable than people expect, so make sure you have enough to protect your family. Even if your employer offers life insurance, you may want to add your own policy.
- Waiting too long. Premiums go up as you get older.
- Not naming a backup. Name a contingent (secondary) beneficiary in case something happens to your primary beneficiary.
- Setting it and forgetting it. Review your policy every year and update it after any major life change.
If you’re also planning for a parent’s care later in life, read Long-Term Care: The Retirement Cost Medicare Won’t Cover.
Get Help Choosing a Life Insurance Policy
The right policy depends on your goals, your family and your budget. Our licensed brokers can walk you through your options at no cost to you. Get your free quotes or call us at (866) 260-9829.
