Learn how to avoid these 13 common but costly mistakes many people make when they buy life insurance.
For most, investing in this kind of insurance is spurred by a desire to protect loved ones from struggling to pay the bills or debts that often follow in the wake of those “life changes” should they, the policyholder, pass away.
As a result, it’s likely that none of these folks want to jeopardize the umbrella of financial support life insurance could offer their children, spouses, or even parents by making mistakes while shopping for or buying a particular policy–especially since any missteps could result in the purchase of an ill-fitting plan, the wrong beneficiaries getting paid, or worse.
If any of the above describes you, read on so you can learn how to avoid some of the most common life insurance mistakes before you ever make them.
Mistake # 1: Waiting too long to buy insurance
Why we do it: Often, a lot of us don’t even think about buying insurance until something happens in our lives that prompts us to remember it—and remember how important it can be. That’s long been true of products like health and renters insurance, and it’s similarly true of life insurance.
What we should do instead: Whenever you go through a major life change—such as getting married, having a child, or buying a house—sit down and give serious thought to purchasing some form of life insurance if you don’t already have it. (And if you do have some amount of life insurance, review it and make sure it will adequately protect you and your family, or other loved ones, in the event the unthinkable happens. If it won’t, you should increase your coverage level until it does.)
Regardless, it’s important to not drag your feet if you have people in your life who will suffer financially should something happen to you, or if you would suffer should something happen to your spouse or other family member. After all, the rates you’re quoted are only going to go up as you get older or as you begin to deal with various health issues—and at some point you may well not be able to buy it at all.
Mistake #2: Picking a policy based only on price
Why we do it: Whenever we’re given a choice between similar products of various prices, most of us immediately lean toward the one with the lowest price. It’s just how we’ve been conditioned as consumers. Unsurprisingly, a lot of people exhibit those same tendencies when they go to buy life insurance—even though picking the cheapest option usually isn’t the best idea.
What we should do instead: Start by considering your needs and the needs of the people you want to protect with life insurance. From there, look for policies that will provide you and your loved ones with benefits, features, and other options that will satisfy those needs. This is where things can get complicated, so be sure to ask your insurance agent or broker for help—clarification, explanations, etc.—if you need it. Once all of that is out of the way, feel free to factor price back into the equation.
Mistake #3: Choosing the wrong type of life insurance for your current needs and circumstances
Why we do it: Life insurance can be a confusing product, no doubt about it. There are so many forms and kinds and variations that wrapping your head around all of them can be challenging. An unfortunate consequence of that, of course, is that some people end up purchasing a type or an amount of life insurance that isn’t right for their needs.
What we should do instead: Carefully research a life insurance plan before you buy it. If something doesn’t make sense during that info-gathering exercise, ask someone at the insurer to explain it to you.
Mistake #4: Borrowing too much money from a whole life policy
Why we do it: There are all kinds of reasons people withdraw money from the “cash value” portion of their whole life (or permanent) policies. Maybe a health crisis pops up that requires a lot of medical care—and produces a lot of medical bills. Or maybe something more mundane happens that prompts you to pull out some portion of your cash value as a loan.
What we should do instead: Although the cash value that’s built up within your whole life or permanent policy can be really helpful, especially in times of need, it’s important to carefully approach withdrawals and loans that make use of those funds. The main reason for this: if you take out too much, you could cause your policy to lapse or run out of money.
Mistake #5: Undervaluing a non-working spouse
Why we do it: A lot of people who invest in life insurance—term life, especially–do so in order to protect against the untimely death of their household’s “breadwinner.” Given that, it shouldn’t be too surprising to hear that non-working spouses, or even spouses who simply make less than their significant others, tend to be ignored from a life insurance perspective.
What we should do instead: Depending on who you ask, non-working spouses are “worth” anywhere from tens of thousands of dollars to hundreds of thousands of dollars. So, even if your spouse isn’t bringing in a salary, or isn’t bringing in a salary that’s comparable to the so-called breadwinner’s, be sure to give him or her a proper amount of attention when it comes time to buy life insurance.
Mistake #6: Only naming one beneficiary on your policy
Why we do it: It’s hard to say, but a good guess seems to be that most of us simply assume that listing just one person as a beneficiary on our life insurance policies will be enough. The problem with that is that lone beneficiary could pass away before you do, a situation that would end with the proceeds of your plan being paid to your estate—which causes a bunch of other problems for any survivors it’s eventually passed on to.
What we should do instead: Make sure you include at least one “backup” beneficiary on your plan, and don’t be shy about including two.
Mistake #7: Neglecting to keep your beneficiary designations up to date
Why we do it: You know that old adage, “out of sight, out of mind”? Well, it’s true for insurance policies just like it is for so many other aspects of life. In particular, it relates to keeping various components of our life insurance policies up to date—and that includes the portion that deals with beneficiaries.
What we should do instead: Every couple of years, pull out your life insurance policy and look it over to see if any of the beneficiary information has to be updated or changed. A few examples of why you may have to alter this section of your plan: your spouse passes away, a non-spouse beneficiary passes away, you get divorced, you get married, you have a child, or even one of your beneficiaries changes his or her name or moves to another address.
An added benefit of this semi-regular review: It may make you aware of the fact that your current plan, or the amount of coverage associated with it, no longer fits your needs or the needs of your loved ones.
Mistake #8: Purchasing a life insurance policy with premiums that increase over time
Why we do it: One possibility is that the initial price of the premium payments associated with the policy were so attractive that it was easy to ignore any potential future increases. Another possibility: the process of buying life insurance and everything that surrounded it was so overwhelming that the potential that a particular policy’s premiums could rise over time was overlooked.
What we should do instead: If there’s any question that you won’t be able to deal with the rate increases that may crop up once a plan’s initial coverage period ends, take a pass on it and go with something else—preferably a form of life insurance that promises a completely (or at least mostly) level premium.
If you already own a life insurance policy that has premiums that likely will increase at some point down the road, stay on top of things and don’t rely on your insurer to keep you in the loop regarding those increases. And when your rate finally increases, sit down and talk with your agent or someone else at the insurance company about your next move—which may mean canceling your policy, letting it lapse, or even asking the insurer to lower the rate again.
Mistake #9: Letting your plan lapse before its maturity date
Why we do it: Although there are times when letting a life insurance policy lapse (either purposely or accidently) can be the right, if not only, move to make, in general it’s considered undesirable thanks to the fact that—when it comes to whole life or permanent plans, at least—doing so puts any related death-claim payments and cash-surrender values in jeopardy, among other ramifications.
What we should do instead: Do what you can to prevent your policy from lapsing—just make sure you don’t ignore other, more important investments (such as retirement accounts) in order to keep it active.
Mistake #10: Investing in a life insurance plan without having a good grasp of its terms or payout conditions
Why we do it: We don’t want to bother the agent or broker who sold the plan to us, or we thought we understood the plan’s particulars when we bought it, when in fact some of it continued to confuse us right up until we signed on the dotted line.
What we should do instead: Become as educated as you can about any life insurance policies you’re thinking of purchasing before you get to the point where you shake an agent’s hand. Which means, of course, that you should feel free to ask that agent as many questions as are needed to bring you up to speed on what a policy will offer you as well as what it will require of you.
Mistake #11: Buying a policy through a professional association
Why we do it: Going through an “affinity group” like a professional association that you may be a member of keeps you from wasting your time fielding quotes from a number of life insurance providers. Also, the rates offered by these groups can look pretty enticing compared to what you may see elsewhere.
What we should do instead: Shop around. You may find after completing that legwork that the association’s plan is the right one for you. On the other hand, it may lead you to realize that a plan provided by a broker or agent is the better option, especially since some hidden costs can be tied to with going the association route. (One example: you usually have to retain your membership in the association if you want to maintain the policy.)
Mistake #12: Failing to treat life insurance like it’s an investment
Why we do it: We often look at other forms of insurance—such as car, health, and homeowners insurance—as being sources of protection or security. They’re not necessarily looked at as investment products. The same tends to be true of certain varieties of life insurance, even though many experts would suggest these types of insurance (variable life being a good example) should be treated just like any other investment.
What we should do instead: Don’t just stick your life insurance policy in a drawer and forget about it. Periodically check in on it, see how it’s performing, and make changes to it if that’s warranted. In other words, do some of the same things you’d do with any other investment account that’s included in your portfolio.
Mistake #13: Owning all of the insurance on your life
Why we do it: If you’re the breadwinner in your household and your goal is to secure the financial futures of a spouse or child or some other family member should the unthinkable happen to you, you very well could decide to take out a life insurance policy on yourself and pay its premiums. The problem with this is that it may result in your survivors having to jump over a number of annoying tax hurdles upon your passing.
What we should do instead: If possible, consider having an adult relative buy, own, and be a beneficiary of an insurance policy on your life–even if you have to provide that person with cash gifts that are then used to pay the premiums.