Life Insurance Basics: What You Need to Know Before You Buy

For most people, life insurance is one of those things we plan to “get around to.” But life has a way of reminding us—often too late—that it’s better to be safe than sorry. Whether you're starting a family, buying a home, or simply planning well ahead, life insurance can offer a valuable layer of protection when the unexpected happens.

Let’s take a look at life insurance basics: how it works, the different types of policies available, and how to choose the right coverage to support your long-term goals.

What is life insurance, exactly?

At its core, life insurance is a contract between you and an insurance provider. You agree to pay regular premiums, and in return, the insurer agrees to pay a lump sum—also known as a death benefit—to your beneficiaries when you pass away. They can use these funds to cover anything from funeral costs and outstanding debts to college tuition and down payments.

Life insurance can feel loaded with jargon, so understanding a few essential terms can help. Knowing these terms can make it easier to navigate the world of life insurance basics with more confidence.

Premium

The amount you pay monthly or annually for your policy

Beneficiary

The person or people who receive the death benefit when you pass away

Coverage limit

The total amount your policy will pay out to beneficiaries

Cash value

A savings component in some whole (permanent) life insurance policies that accumulates over time and can be borrowed against while you’re still alive

If you want a deeper dive into terminology, the Consumer Financial Protection Bureau offers a helpful glossary of insurance terms.

What are the main types of life insurance?

Most life insurance falls into two main categories: term and permanent.

Term life insurance provides coverage for a specific period—usually 10, 15, 20, or 30 years. It’s typically the most affordable option and works well for people who want coverage during their working years or while raising children.

Permanent life insurance lasts your entire life and builds cash value over time—a savings-like feature you can use while you're still living. There are a few types of permanent policies:

• Whole life insurance offers lifelong coverage with fixed premiums and guaranteed benefits. It also builds cash value that grows at a steady rate over time. It’s simple to manage and a good choice for those who want stability, though it tends to cost more than term.
  
• Universal life insurance also provides lifelong coverage but with more flexibility. You can adjust your premium payments and, in some cases, your death benefit. The cash value can grow based on interest rates or other factors, so it may require more attention over time.
• Variable life insurance includes investment options. You can invest your cash value in market-based accounts (similar to mutual funds), which means it has more growth potential—but also more risk. It’s best for those comfortable with investing.

How much life insurance do you need?

Everyone’s situation is different, but a common rule of thumb is to carry coverage equal to seven to 10 times your annual income. For example, a person earning $60,000 per year with a mortgage, car loan, and two children might consider a policy between $400,000 and $600,000.

When deciding how much coverage to get, consider your current debts, family’s lifestyle, childcare and education costs, and how long your loved ones might need financial support.

An online life insurance calculator can help you estimate your needs more precisely.

When should you buy life insurance?

In general, the sooner the better. Rates are typically lowest when you're young and healthy. Even if you don’t have dependents now, locking in a lower premium early can be a smart long-term move—especially if your health changes later.

Big life events—such as getting married, having a child, buying a home, or starting a business—are also good moments to explore your coverage options.

What if you need more coverage later?

Life insurance isn’t necessarily one and done. Many policies allow you to adjust your coverage or update your beneficiaries over time as needs evolve, especially during specific “policy anniversary” periods or after qualifying life events. That said, some term policies may not allow increases without purchasing additional coverage or converting to a permanent policy.

It’s wise to review your policy periodically with your insurance agent—especially after major milestones such as a birth, divorce, or buying a new home.

Bottom line: Should you buy a life insurance policy now?

Life insurance isn’t just about worst-case scenarios; it’s about creating peace of mind for the people you love. Whether you’re looking for a low-cost term policy or exploring long-term investment options, there’s likely a plan that fits your goals and your budget.

Not sure where to start? Visit AAA.com/lifeinsurance to explore coverage options, talk with an agent, and get personalized guidance every step of the way.