Common Mistakes to Avoid When Buying Life Insurance

Setting up a life insurance policy is one of the most important parts of effective financial planning – but how do you know which type of policy is best for you and your family when choosing life insurance?

You're in the right place if you want to learn more about buying life insurance, tips for finding the best policy, and how to make the most out of your coverage.

Keep reading to learn more about the most common life insurance mistakes and how to avoid them.

10 Common Life Insurance Mistakes

1. Failing to Assess Your Needs Properly

When purchasing life insurance, you should start by thoroughly assessing your needs, which includes knowing your take-home pay, your spouse's take-home pay, and your average monthly expenses. This is a foundational step because it can help safeguard your family's future while avoiding overpaying.

Inadequate planning usually results in a few common pitfalls – overpaying for coverage you don't need, being underinsured, and leaving your loved ones without enough financial protection. Overestimating your needs might mean allocating more of your budget to premiums than necessary, while underestimating them might leave gaps, failing to cover big expenses like a mortgage or your children's higher education expenses.

For example, a young couple purchased a policy with minimal coverage, thinking it would be fine since they did not have children. Unfortunately, the wife passed away unexpectedly, leaving her husband unable to cover their entire mortgage since they both substantially contributed financially. Since they didn't have enough coverage, it caused major financial strain during an already difficult time.

You can avoid these issues by thoroughly evaluating your needs. You should consider income replacement – you'll need enough to cover several years of lost income. Think about any outstanding debts that need to be paid off, like student loans or mortgages, and future expenses like your children's education costs.

2. Relying Solely on Employer-Provided Life Insurance

Many people think that their employer-provided life insurance will be enough for their family to get by after they pass away, but the truth is that in many situations, you'll need additional coverage.

Not only do most group policies provide a relatively small benefit, which would likely only cover funeral expenses, but you will also lose coverage after leaving your job. This means that if you are unexpectedly laid off or fired, you'll be without life insurance and scrambling to get a new policy.

For example, the average benefit of group life insurance policies is the employee's annual salary. On the other hand, you can set up your private life insurance coverage to pay out several years' worth of your annual salary, giving your loved ones more time to grieve without worrying about finances.

This is why you should always supplement your employer-provided life insurance with a private policy. It can fill in the coverage gaps while ensuring you'll still be covered even if you lose your job.

3. Choosing the Wrong Type of Policy

Sometimes, the biggest mistake you can make when purchasing life insurance is choosing the wrong type of policy. There are two large categories of life insurance – term and whole life.

Term life insurance provides a death benefit for a set period of time or term. Usually, this term lasts about 10 to 30 years, but some companies offer longer or shorter terms. Because term life eventually expires, it's a much cheaper option if you don't have a large budget for life insurance.

If you want coverage for the rest of your life, whole life insurance is your best bet, but you'll definitely pay more in premiums upfront. However, life insurance gets more expensive as you get older, so locking in a rate while you are young could help you pay less over the course of your life.

When choosing between these two types of policies, think about your current budget. Can you afford a higher premium, or do you need to keep costs lower for now?

You should also think about your life stage – do you need a policy just to cover the mortgage and your children's expenses until they leave the house, or do you need life insurance to supplement your retirement income? Young families will have different needs than older couples.

4. Underestimating the Importance of Health Disclosures

When applying for life insurance, honesty is always the best policy. You'll have serious repercussions if you withhold information or health disclosures, because there are typically exclusions within life insurance policies which could make your policy void.

Insurance companies rely on your health information to assess the risk and determine your premiums. Failing to disclose preexisting conditions, lifestyle habits, or past medical procedures may seem like a way to secure a lower premium, but it can backfire. If the insurance company discovers any inaccuracies, they may deny your application, void your policy, or reject claims when your family needs the benefits most.

For example, Marilyn, who had a history of high blood pressure, didn't mention this condition during her life insurance application process. Years later, when she passed away from a stroke, the insurer reviewed her medical records during the claims process and found this omission. As a result, the insurer denied her death benefit, leaving the family without the financial support they were counting on while they were grieving.

This example shows why it's crucial to be honest and transparent when providing health information during your application process. Remember to disclose all medical conditions, lifestyle factors, and ongoing treatments, even if it might increase your premium. It's better to pay a slightly higher premium for a legitimate policy than to risk your family being left without coverage when it matters most.

5. Focusing Solely on Premium Costs

While choosing a policy that aligns with your current budget is important, the cheapest life insurance policy isn't always the best policy. Low-cost policies often have limited coverage with unfavorable terms, which may not align with your family's current or future needs.

Policies with lower premiums are usually limited in terms of the term length and the benefits. Keep in mind that the older you get, the more a life insurance policy will cost, so locking in a rate for a longer period of time is usually the best practice.

As you shop for policies, try balancing affordability with comprehensive benefits. If you can go for a policy that may cost a few dollars more per month but lasts ten or twenty years longer, it might be worth the extra expense in the long run!

6. Not Comparing Multiple Providers

As you look for the right life insurance policy, you should avoid choosing the first policy you find – this comes with risks. Shopping around for a policy can help you save money while also providing better terms. You should compare premium costs, cash value, term length, and flexibility in adjusting coverage and payments if needed.

You should also compare different life insurance companies. Check to see that each company is in good financial standing and has a good customer reputation. After all, if the company goes out of business, your life insurance policy will also go along with it.

If you need help comparing different policies and companies, consult a financial advisor or insurance professional. Many companies also provide free quotes online, so be sure to compare each quote side by side.

7. Buying Life Insurance Too Late

One of the biggest mistakes many people make is buying life insurance too late in life (or not having life insurance at all). Age and preexisting health conditions are two of the biggest factors increasing premiums. This means that if you buy life insurance at a younger age, you'll likely pay less in premium costs for a longer term.

Here's an example – let's say you purchase a term life insurance policy for $250,000. At 30 years old, the average cost of a policy like this is around $15 or $16 per month, while if you purchase the same policy at 60 years old, the price could range between $59 and $78. That means it can cost you nearly four times as much if you wait too long!

If you start shopping for life insurance earlier in life, you'll lock in lower premiums while also being covered for more of your life. Even if you're young, emergencies happen, and preparing for the future is important.

8. Ignoring Policy Riders and Add-Ons

Many overlook the importance of policy riders and add-ons when shopping for life insurance. These optional provisions can enhance your coverage, giving you more tailored protection to meet your family's individual needs.

So, what exactly are riders? Riders are additional benefits you can add to your base life insurance policy, typically for a slight increase in premium. This helps you customize your coverage with add-ons like critical illness protection, accidental death benefits, or a waiver of premium in case of disability.

Riders might seem unnecessary, which is why many people skip them. However, these add-ons can make a big difference in unforeseen situations. For example, a critical illness rider will pay a lump sum payment if you're diagnosed with a severe illness, which helps cover medical expenses or lost income as you recover.

Likewise, a waiver of premium rider allows your policy to remain active even if you become disabled and can no longer afford to pay premiums. Neglecting these options could leave you financially vulnerable in scenarios your base policy doesn't cover.

Be sure to review available riders carefully to choose those that align with your financial goals and life circumstances. If you have dependents, a child rider can provide coverage for your children. Or if you're the primary breadwinner, a disability income rider may be a good option.

9. Neglecting Regular Policy Reviews

Once you purchase life insurance, reviewing your policy coverage every year is critical. This is important because, for most people, life insurance needs can and will change over time. For example, your financial circumstances will change when you get married, have children, or purchase a home. When your financial situation changes, your life insurance policy must reflect these changes.

For example, Mitch and Mary forgot to update their coverage after they had kids. Unfortunately, Mitch passed away when his children were ages 5 and 7, leaving Mary to take care of the kids and pay the mortgage solely on her income, which was a huge stressor and financial strain. If only they had kept up to date on their policy, she wouldn't have had to deal with this massive burden.

This is why scheduling periodic reviews is essential – you want to ensure your policy always reflects your current needs.

10. Failing to Name (or Update) Beneficiaries

Your beneficiaries are the most crucial part of your life insurance policy. Without them, your benefits would have nowhere to go! Unfortunately, many people forget to name their beneficiaries on the policy, or even worse, forget to update their beneficiaries.

Let's say that Lisa and Frank got a divorce, and then Lisa remarried a few years later. Lisa forgets to update her beneficiary to her second husband, and when she passes away, her entire policy goes to Frank instead. As you can imagine, this can lead to some significant disputes!

You can avoid this problem by reviewing your policy to check that you've named your beneficiaries. Check the policy every year in case you need to update your beneficiaries.

Conclusion

Whether you forgot to name a beneficiary or choose the wrong policy for your needs, these common life insurance mistakes can completely derail your future plans for your family. That's why applying these tips when buying life insurance is so important – thorough preparation is key!

Consult a Think Life Insurance professional today to help you determine the best life insurance option for you and your family – we want to keep you covered in every situation!

FAQ

What is one of the biggest mistakes made in the life insurance decision?

Waiting too long to get a policy is likely one of the biggest mistakes you can make when it comes to life insurance. The sooner you get a policy, the better!