During the course of our day to day activities, we have seen many different mistakes that are made by consumers and owners of life insurance policies. These mistakes occur during the time of purchase and are discovered upon reviewing in force policies.
Buying a life insurance policy may be the most important decision you could make. Let’s review the worst mistakes to avoid when buying life insurance.
1. You Procrastinate Your Policy Purchase
If you need life insurance, sooner rather than later is the time to buy. Premium rates increase as you get older. You also risk developing health conditions, such as cancer or high blood pressure, which make finding a policy harder or more expensive. Also, keep in mind that catastrophe can strike anyone at any time, so you want to buy a policy before you need it.
2. You Buy a Policy Without Shopping Around to Compare Rates
There are a variety of factors that go into the rate for policies, and they vary widely by company. For example, the price for a 15-year, $500,000 term life policy for a non-smoking, healthy 35-year-old man can range from $185 to $837 a year, depending on the company.
Good insurance agents work with many different companies so that their goal can be getting you the best rate for the policy that fits your needs. You should consider your life insurance a significant purchase, such as a car or a house — all instances where you wouldn’t purchase the first one you find without first exploring other options.
3. You Buy a Policy Without Considering Your Health Conditions or Lifestyle
Many health and lifestyle factors determine the premium you will pay for your policy. Certain insurance companies look more favorably at conditions that can raise your monthly premium, such as smoking, depression, or diabetes.
It is important that you tell your insurance agent about any “impaired risk” (anything that may influence the cost of your policy) up front. Even having a history of DUI or being convicted of a felony can make getting a policy challenging, but not impossible.
Your agent knows how best to present this information to the insurance company, and what company will be best to apply to in your situation, so make sure to discuss it before you apply.
4. You Choose the Wrong Type of Policy
Term life insurance is a straightforward policy that pays out if you pass away within a certain time period – regardless of the cause of death. You pick the amount of coverage and the policy term in advance, and your payments and benefit amount are guaranteed to stay the same.
Accidental Death and Dismemberment (AD&D) insurance is sold as a separate product or as a rider on a term life insurance policy. Contrary to term life insurance, AD&D coverage pays out only if you are killed or injured in an accident.
For example, if you die from cancer or a stroke, there’s no payout. Generally speaking, AD&D policies may not require underwriting and are very cheap to buy.
5. You Buy the Wrong Amount of Coverage
To calculate the proper amount of how much life insurance you need, add up your long-term outstanding debts then deduct your existing life insurance coverage, and liquid means such as savings. Expenses may include college tuition and other child-related expenses, the property loan along with other debts and your annual income multiplied by the years you’d want it replaced.
6. You Only Consider the Price of the Policy
Although the monthly premium price is often a significant deciding factor in which policy you buy, there are a few other things to take into account. Two main things you should also consider are the insurance company’s financial strength, and the policy’s guaranteed benefits.
If you’re shopping for a term policy, it’s best to compare the death benefit, the cost of the policy and the company’s rating to competitors to give you an idea of the most insurance for the longest term at the best rate from a stable company. If you’re buying a permanent policy, compare the interest rate of each policy.
7. You View the Purchase as a One-Time Activity
As with other financial planning matters, life insurance requires periodic reevaluation, and so should be seen as an ongoing process. Your income and expenses are likely to change over time, as well as the people who should be the beneficiaries.
It’s best to talk to your insurance agent to review your insurance needs every few years, or whenever there is a major change in life events, such as in income, expenses, marital status, the birth or death of a family member, or with major new purchases, like a new house.
8. You Name a Minor as Your Beneficiary
If your beneficiary is a minor and you die before they turn 18, the life insurance company won’t be able to pay the policy benefits until the court appoints a guardian. That takes time but also costs money for an attorney and court fees.
You also risk someone with whom you would not necessarily have agreed being in charge of the money. Instead, you should name an adult as the beneficiary, or set up a trust for your children so you can direct how the money should be spent.
9. You Name Your Estate as Your Beneficiary
It’s best to designate a trust, an organization, or the people you want to receive the policy proceeds as beneficiaries. If you designate your estate instead, your estate’s beneficiaries won’t receive the policy benefits until after the legal probate process finishes.
This process can take months or years if your estate is complicated. The policy benefits can also then be vulnerable to creditors.
10. You Forget to Keep Your Beneficiary Designations Up-To-Date
Your beneficiary designation determines who will inherit the proceeds of your insurance policy. When you first buy the policy, you fill out a form to name your beneficiaries, however, many people forget to keep them current.
Marriage, divorce, birth, and death can all necessitate a change in who you designate as a beneficiary.
11. You Purchase Your Policy Through Your Employer
Many employers offer group life insurance as an employee benefit, but typically the amounts of life insurance employers provide usually are not enough for people who need life insurance. Further, the coverage typically ends when you leave the company, which can leave your family without the protection you are trying to provide.
12. You Purchase Your Policy Through Your Membership in an Affinity Group
Many professional associations and organizations offer life insurance to members at group rates. However, you might be surprised to learn that the price won’t necessarily be less than what your insurance agent can find for you.
There is also a hidden cost of buying insurance this way, too – to maintain the policy, you usually must keep your annual membership in the group, which usually means paying membership fees or dues, which can go up in price every year.
So while your monthly insurance premium may stay the same over time, the overall cost associated with the policy increases.
13. You Forget to Watch for Rate Increases
With a level premium, term-life policy, the cost of the plan is guaranteed for a set period (for example, 10 or 15 years). But after that, the premium can jump well beyond what you had been previously paying. It’s up to you to watch out when the term of your policy is up. When this happens, it’s best to contact your insurance broker to help you submit an updated medical history, which may get you a lower rate, or shop around for a new policy.
14. You Don’t Consider Estate Taxes
If you are both the insured and the policy owner, the proceeds are considered part of your taxable estate upon your death. This means that the funds from your insurance policy are added to everything else you leave behind. If the total of this amount is more than the tax-free “exclusion” amount, it will be subject to an estate tax (unless you have left it to anyone except your spouse or a charity).
You can avoid the estate tax on life insurance pay-outs by designating a beneficiary to receive the proceeds of the policy, such as an adult child, as the owner of the policy. If you don’t want the beneficiary to receive the policy benefits outright, or they are a minor, you can set up an ILIT – irrevocable life insurance trust. The ILIT can buy the policy and will hold the proceeds upon your death for your beneficiary.
15. You Keep Your Insurance Policy a Secret
Even if you don’t disclose the exact amount or full details of your policy benefits, make sure that somebody close to you knows you have it. If no one knows about the policy, your beneficiary may not know to make a claim upon your death.
It may be advisable to tell: your spouse, your adult children, a financial advisor, an estate planning attorney, anyone you appoint in your will, and/or the executor of your estate.
16. You Cancel Your Current Policy Before You Have the New One
Should you decide that you need to update your policy, make sure your new policy is fully in force before you cancel the old one. Otherwise, you risk being without a policy altogether in case your new application is not approved.
17. You Think Only the Main Breadwinner in the Family Needs to Be Insured
People commonly think life insurance is a way to avoid loss of income when the main breadwinner of the family dies. In reality, stay-at-home parents also fulfill a full-time position for the family by means of childcare, home care, meals, and/or education.
You should insure every member of the family, even if you only purchase term life coverage to pay for final expenses.