Financial illiteracy and underinsurance have been revealed to be critical issues in the financial sustainability and well-being of families. However, studies show that financial literacy does not necessarily translate to insurance literacy, and more specialized education can improve insurance literacy. Little is known about the impact of insurance illiteracy on the inclination to seek and retain insurance. Considering this gap, our study aimed to investigate the direct and indirect effect of consumers’ insurance literacy on purchasing decisions of personal insurance. The study sample consists of middle-class consumers in Sri Lanka. A total of 300 valid questionnaires were collected and analyzed using a variance-based structural equation modeling. The results revealed that insurance literacy directly, and through its mediators of trust, perceived benefits, and favorable attitudes towards insurance, impacts the behavioral intention, significantly and positively. The cognition-based trust affected the purchase intention only through its mediators. Additionally, there is a significant difference between those who are having and not having insurance in terms of insurance literacy, trustfulness, and perceived value of insurance. This study is relatively a pioneer study, and findings will be of great interest to academicians and policymakers to encourage personal insurance as a tool in achieving financial security and well-being