Learn how to avoid these 13 common but costly mistakes many people make when they buy life insurance.
All sorts of situations push people to buy life insurance: buying a house, getting married, having kids, even starting a business.
For most, protecting loved ones financially should they pass away is the primary reason the invest in life insurance.
It's likely that none of these folks want to jeopardize the umbrella of financial support life insurance could offer their loved ones by making mistakes while shopping for a 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.
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 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.)
Don't drag your feet if you have people in your life who depend on you financially. 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.
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.
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.
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: The cash value within your whole life or permanent policy can be really helpful. But 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.
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. Even if your spouse doesn't work or does but makes very little, don't simply ignore their role.
Why we do it: Most of us assume listing one person as a beneficiary on our life insurance policies is enough. But if your lone beneficiary dies before you do the proceeds of your plan could be paid to your estate. And this 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.
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:
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.
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 you think you won't be able to afford a plan if it's rate increases once the initial coverage period ends, take a pass on it and go with something else.
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. 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 directly with your insurer about your next move. And this could mean canceling your policy, letting it lapse, or even asking the insurer to lower the rate again.
Why we do it: There are times when letting a life insurance policy lapse is the right move. But it's generally a bad idea because it puts any related death-claim payments and cash-surrender values in jeopardy.
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.
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 details when we bought it. But 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. Feel free to ask the 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 costs.
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.)
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. But many experts would suggest these types of insurance 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.
Why we do it: You 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. This makes sense even if you have to provide that person with cash gifts that are then used to pay the premiums.
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