Despite its importance, life insurance is often overlooked—partly because discussing death is uncomfortable and partly because choosing the right coverage can be confusing.
To simplify the process, we've researched the best life insurance companies and created this guide to help you avoid common mistakes and secure the right coverage for your needs.
Key Insights on Life Insurance Mistakes
Life insurance allows you to provide for your loved ones even after you're gone.
The earlier you purchase life insurance, the lower the premiums will be.
Review policies regularly, especially as you reach milestones such as marriage, retirement, home buying, and children's birth.
Comparing quotes from multiple providers ensures you get the best price for the coverage you need.
The 10 Most Common Life Insurance Mistakes
1. Waiting Too Long to Buy
Age and health are the two main driving factors behind premium rates for life insurance. As you age and develop health issues, you can expect to see premiums increase.
The question, "I'm in my 20s or 30s. Do I need life insurance?" is common, but delaying the purchase leaves your loved ones uncovered in the event of your death. It can lead to much higher premiums and even disqualification from specific policies.
For example, in a quote obtained from Ladder, a healthy 20-year-old may pay as little as $18 a month for $500,000 of life insurance, while a healthy 50-year-old would pay more than 3x as much for the same coverage.
2. Not Determining Your Coverage Needs Adequately
Life insurance coverage is not one-size-fits-all, and underinsuring can leave your loved ones vulnerable. To determine your coverage needs, you must consider your current income, spending habits, outstanding debts, and future expenses, such as college tuition.
A common rule of thumb is that your insurance coverage should be equal to 10 times your annual income and have a term equal to the years you have left until retirement. Alternatively, you can use a life insurance calculator to help you determine your coverage.
3. Buying the Cheapest Policy Without Considering Coverage
Everyone loves saving money, but selecting the cheapest policy without evaluating coverage needs and timeframes can be costly in the long run. Life insurance comes in two primary forms, each with distinct advantages:
- Term life insurance: Provides coverage for a specific period (typically 10-30 years). If you outlive your policy term, your coverage ends, and no benefits are paid. Term insurance offers substantial coverage at lower initial premiums, making it accessible for most budgets.
- Permanent life insurance: This covers you for your entire lifetime as long as premium payments continue. These policies, including whole and universal life insurance, build cash value over time that you can borrow against while living. Because the insurer guarantees an eventual payout, premiums are significantly higher.
As you assess your insurance needs, you might find term insurance offers sufficient protection at an affordable price. However, depending on your long-term financial goals and family situation, permanent coverage might better serve your needs despite the higher cost.
The key is making an informed decision based on your complete financial picture rather than the premium amount alone.
4. Not Shopping Around and Comparing Quotes
Life insurance premiums vary widely between insurers, even when the policy terms are similar. Much like how you might shop around for car or health insurance, you can compare quotes from multiple insurers to find the best coverage at the best price.
Learning about different types of life insurance can simplify this process and help you find the most affordable coverage that meets your specific needs.
5. Failing to Understand Policy Exclusions and Limitations
Each life insurance policy has exclusions and limitations that may affect claims. Standard exclusions in most policies affecting claims are deaths resulting from risky activities, criminal activities, fraud, or suicide (usually in the first few years of the policy).
While nobody loves reading the fine print, getting into the details is essential. It's better to know upfront what coverages apply than for it to surprise your loved ones when they need it most.
6. Overlooking Riders and Additional Benefits
Life insurance riders are optional add-ons to policies that allow you to customize your coverage. Common riders include:
- Accelerated death benefits: Allows you to access some of your death benefits while you're still alive if you're diagnosed with a terminal condition.
- Cost-of-living riders: Incrementally increase the value of your policy over time to pace with inflation.
- Long-term care riders: Gives you access to a portion of your death benefit to pay for qualified long-term care expenses through reimbursement or lump sum payment.
- Waiver of premium riders: Waives premium payments if you become disabled.
7. Allowing Premiums to Lapse
Insurance policies represent binding contracts between you and the insurer, guaranteeing coverage only as long as you fulfill your payment obligations. When premiums are missed or paid late, you risk temporary gaps in protection and potentially losing your policy altogether.
Once a policy lapses due to non-payment, reinstatement often requires new medical underwriting—meaning your current health conditions could result in much higher premiums or even denial of coverage.
To safeguard your coverage:
- Set up automatic payments directly from your bank account
- Create multiple calendar reminders before due dates
- Consider paying annually instead of monthly to reduce the chance of missed payments
- Keep your contact information updated with your insurer
While many insurers offer grace periods (typically 30 days) for late payments, relying on these exceptions is risky. Some companies charge additional fees or interest during grace periods, and policies vary significantly in their reinstatement terms.
Always thoroughly review your policy's specific provisions regarding missed payments before signing.
8. Not Regularly Reviewing and Updating Your Policy
Most financial advisors recommend an annual review of your financial plans, including your life insurance coverage. Beyond this routine assessment, certain life events should prompt an immediate reevaluation of your policy.
According to the DC Department of Insurance, Securities, and Banking (DISB), significant life changes that warrant a coverage review include:
- Expanding your family through birth or adoption
- Relationship changes such as marriage, divorce, or remarriage
- Taking on new financial obligations like mortgages or loans
- Career transitions affecting your income or benefits
When you take on new dependents or financial obligations, you may need to increase your coverage. Conversely, as children gain independence, debts get paid off, or retirement approaches, reducing your coverage can help avoid unnecessary premiums.
9. Neglecting Beneficiary Updates
When you apply for life insurance, you must designate beneficiaries—those who will receive your death benefit. This designation occurs before policy approval and trumps instructions in your will.
Life events requiring immediate beneficiary reviews include:
- Marriage or divorce
- Birth or adoption of children
- Death of a current beneficiary
- Significant relationship changes
Without updated beneficiaries, your death benefit may go to your estate, causing probate delays and potential tax implications. After divorce, you might want to remove an ex-spouse as a beneficiary.
However, you should check your divorce decree first, as some settlements legally require maintaining former spouses as beneficiaries for specified periods.
Most insurers make beneficiary updates straightforward through online portals or simple forms, making this essential maintenance task quick and accessible.
10. Not Consulting with a Professional
Navigating life insurance can be overwhelming, especially for first-time buyers. While many fantastic comparison tools are available, you may want to consult a professional.
Financial advisors or qualified insurance agents can help you understand policy features, riders, and timeframes. These professionals can also provide tailored advice based on your circumstances and help you compare coverage to get what you need at the best price.
Bottom Line: Provide For Your Loved Ones Properly
To avoid these life insurance mistakes, you should get insurance early to keep premiums low, consider policy riders to customize and enhance your coverage, compare quotes, and review your policy regularly to account for changes due to life events.
For personalized guidance, consider consulting a financial professional who can assess your situation and recommend optimal coverage. With thoughtful planning, your life insurance can provide the right protection for your loved ones.
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