Top 10 life insurance mistakes

Here are the top 10 life insurance mistakes I see people make, in no particular order. Shopping for life insurance can be a daunting process. Where do you start? Who do you trust? What’s the process? Where do you get the best coverage at the best rates?

If you have asked yourself these and other questions about life insurance, you’re not alone. I speak to people daily who have looked into life insurance at some point and ended up putting it off. Some end up with analysis paralysis and just hit the brakes. Others are just too busy with everyday life that they mean to get the process started, but never get around to it.

On the other hand, if you already have life insurance you may be wondering if you have the right coverage in place. Maybe your situation has changed, for better or worse, and you’re not sure if your coverage should change with it.

Hopefully, this will help you avoid the most common pitfalls that I see on a regular basis.

  • Waiting too long to get life insurance
  • Waiting for a ‘scare’ to look into life insurance
  • Underestimating the amount of coverage needed
  • Choosing the wrong type of policy or duration
  • Focusing only on price when comparing policies
  • Ruling out a guaranteed issue policy
  • Not having an insurance review
  • Not reading the policy
  • Depending on the policy as an investment
  • Keeping it a secret

Waiting too long

Let’s face it, life insurance is probably not the most exciting thing you’ve considered buying. It’s not shiny and fun like a new car, or a bigger TV. In fact, it’s one of those purchases that most people hope to never have to use. That’s why so many people wait years before buying life insurance.

Even though you know that you should have coverage in place to protect important people in your life, you may have been procrastinating for a while now. It’s easy to do. You may be young and healthy and thinking “I’m not planning on going anywhere. It’s not time for life insurance.” The reality is, however, we have no idea how much time we have on this planet.

Everyone has their reasons for considering life insurance. Those reasons usually include providing for a spouse, children and/or other family members who depend on them. Paying off mortgages, auto loans, credit cards and other financial obligations typically fall under the same umbrella. If you pass away, some of those same people may inherit your debts.

Whatever the reasons that have you considering life insurance, the earlier in your life you move forward, the more affordable your policy will be. Life insurance companies favor the young and healthy when it comes to premium costs.

Waiting until something scares you into it

This is closely related to waiting too long. It’s human nature to think that you’re invincible and have all the time in the world. This is especially true when you’re young and healthy. I can’t tell you how many people I talk to who start looking into life insurance after a health problem surfaces.

That heart attack, cancer scare, elevated blood pressure or cholesterol suddenly puts things into perspective for many of us.

You might have a rude awakening when you find out that your recent diagnosis will cause your rates to skyrocket. Those quotes from a year or two ago are suddenly no longer an option.

Or worse, no one will issue coverage because of your current health condition(s). This might sound harsh, but insurance companies are in the risk business. Once someone’s considered a high risk to insure, it will be reflected in the rates extended by the company or in a declined application.

Waiting for a scare

Waiting for a scare to look into life insurance

So, once again, the absolute best time to buy a life insurance policy is when you’re young and healthy. Hindsight’s 20/20 of course, so my best recommendation to anyone who’s been procrastinating, even though they know they need coverage, is to start the process. Reach out by requesting a quote, emailing or calling and let’s discuss options.

Underestimating the amount of coverage

While any amount is better than none at all, being under-insured won’t accomplish your goal of providing for your loved ones. For most of my clients, knowing that they won’t be leaving their loved-ones “holding the bag” is one of the main driving factors to having life insurance.

You can figure out how much life insurance you need in a few ways. One of the most common is to calculate the expenses & debts your beneficiaries will incur if you died. Mortgages, credit card debt, auto loans, burial costs are typically of primary concern for most people.

You may also want to provide a salary replacement to your spouse or other family member(s). This is usually calculated for a specific amount of time. Many people combine both methods, calculating total debt then adding 5/10/15 years of their salary.

In the end, there are many way to assess how much life insurance you feel will be adequate for your specific situation. The main question to ask yourself is “will my beneficiaries be adequately taken care of if I’m gone tomorrow?”

Choosing the wrong type and/or length of coverage

You may have read elsewhere on this site about how you can benefit by working with an experienced life insurance broker. A trustworthy broker can help you determine what type & length of coverage makes the most sense for you.

The other side of that coin are agents/brokers who make recommendations that are more about their commission than your needs. Hopefully, you can spot this when it’s happening, but it’s not always obvious.

You would do well to ask yourself a few questions when considering what type of life insurance policy will work best for you. Here are a few good questions to get you thinking in this direction:

  • Do I need permanent coverage (ie. that I cannot outlive)?
  • Will my future financial picture affect how much coverage I need, or if I still need any?
  • Once my primary debts are paid will I still need coverage?
  • Once my dependents are self-sufficient will I still need as much coverage, or any?
  • Do I now, or will I eventually, have enough assets to be self-insured?

While this is not an exhaustive list of questions, the point is to ask yourself what you actually want out of a life insurance policy. Let’s say your mortgage is your primary concern and you want your spouse to be able to keep the house if something happens to you. If you have 15 years left on the note, then maybe a 15 or 20 year term life policy is your best option. On the other hand, if you have a special needs child that will require assistance well into adulthood, then a longer term, such as 30 years, or a permanent policy might make the most sense. In this specific situation, permanent life insurance held in a special needs trust may be the best option.

I’m always happy to make recommendations based on your goals. However, I strongly suggest giving it some thought on your own and listing out your priorities. If the situation warrants it, maybe even discuss it with your intended beneficiaries. This may not be worst item on this list of top 10 life insurance mistakes, but it comes up often enough to earn it’s place on it.

Focusing only on price and/or suffering from analysis paralysis

This is one of top 10 life insurance mistakes you can easily avoid. You might be in the research phase currently. You’ve talked to a few agents, maybe friends and family. You’ve definitely been doing some reading online. You’re reading this, aren’t you?

Being well informed prior to making a financial decision is important to many of us, myself included. At some point, however, you have to bite the bullet and make a call.

I’ve heard too many stories, from colleagues and my own clients, of people who couldn’t make a decision. They kept putting it off to do more research or to perhaps find that special company or product that no one’s told them about yet. All of a sudden enough time has gone by that their rates are higher because they’re older and/or in poorer health. Or worse, they pass away before actually securing coverage.

Sounds a little far fetched, but it happens. I know agents who have gotten a call from the spouse of someone they were working with in such scenarios. They had the awful task of telling that grieving husband or wife that their loved-one never made a decision and actually put a policy in place.

The other side of that coin is considering only price when evaluating your options. 2 or 3 policies might offer the same death benefit and term length, but come at significantly different price points. Consider the features that come with each policy and determine which are most important to you.

There’s often a reason why one policy is more expensive than another, provided you’re in the same risk class with both carriers.

A common example are included living benefit riders in one policy vs. the additional cost of adding them to the other. Most often, once you add them to the policy that doesn’t include them, that policy becomes more expensive than the one with those benefits built-in.

You should also consider each carrier’s ranking and history. Of course we all think it would be great to save a few bucks on our insurance. But is it worth the risk that your beneficiaries may have to fight with a subpar insurance company when it’s time to file a claim?

Ruling out a guaranteed issue policy

Why does this belong in a list called the top 10 life insurance mistakes? Because I talk to people on a daily basis who are ineligible for traditionally underwritten life insurance.

Whether it’s term life, universal life, or final expense (whole life), they simply cannot qualify for those policies. This is typically due to significant health issues, but it can also be because of a felony, DUIs on their driving record, recent bankruptcies, and other reasons.

In these situations, guaranteed issue life insurance is usually the recommendation. It does not require any medical exams or health questions and as long as you’re in the age range and can afford the payments you qualify. Many people look down on GI policies, though.

They often see it as a last resort or don’t like the higher premiums.

I think that’s a mistake. If you’re concerned about someone who will suffer financially when you pass and your health is such that you cannot qualify for an underwritten policy, then all the more reason why you should have something in place. GI might not be your first choice, but I wouldn’t rule it out on principal alone.

The reality is that it’s a no risk scenario for you as the insured, as long as premiums are paid of course. Most GI policies pay out the full death benefit if death occurs from an accident in the first 2 years.

Years 3 and beyond they pay the full death benefit regardless of cause of death. If death occurs of natural causes in the first 2 years, most GI policies return premiums paid up to that point + 10%. So, worse case scenario, everything you’ve paid into the policy (+10%) goes back to your beneficiary.

Not having an insurance review

Having an insurance review every few years can be beneficial in ensuring that you’re not leaving money on the table and that your needs are being met.

An agent or broker that you trust can help uncover potential cost savings or identify something that may be more advantageous to your goals by looking at your existing life insurance against new industry offerings.

Right about now you may be thinking “Goals? What goals? I just need insurance to take care of my family if I die.” While, ultimately, that could be why you have life insurance or you’re looking into it, it helps to be strategic about it.

You might approach coverage differently if you have young children, a mortgage and a stay-at-home spouse than if it’s just you and your spouse and you rent a home. Planning for mortgage protection & income replacement for your family is different then leaving money behind to your spouse so that he/she can move on.

On the issue of cost, it’s not uncommon to be able to save money on premiums if your health has improved since putting your current coverage in place. Quitting tobacco products will also make a significant difference. There’s also the possibility that you were sold an inferior product or the wrong product for your circumstances.

Keep in mind that insurance companies will only allow the replacement of an existing policy with a new one if it’s clear that it’s advantageous to you as the insured. This acts as a layer of protection to you as a consumer. An agent or broker looking to score a quick commission won’t be able to replace a policy you already have without showing a legitimate benefit to you.

Not reading the policy

I have to admit that I’m surprised at how many people I talk to that can’t answer basic questions about the life insurance they have in place. While a life insurance policy isn’t the most exciting read, I think it’s important to go through it when you receive a new policy.

What if you were explained one thing by the agent who sold it to you, but you actually received something different? What if you thought your monthly premiums would never change and you find out a few years down the road that they actually increase every 3-5 years? What if you were told that the death benefit never changes, but it actually decreases every year in step with your mortgage?

These things happen more often than most people think. You can easily avoid nasty surprises by reading your policy and calling your agent or broker with questions on anything that’s unclear.

Life insurance policies come with a Free Look period. It’s designed to give you time to review the policy and cancel it if you’re not satisfied. If canceled within the free look period, any premiums paid are refunded to you. It’s a law that every insurance company must abide by.

Depending on the policy as an investment

Most permanent life insurance policies build, or have the potential to build cash value. This is sold by most agents & brokers as a “forced savings account”. You can borrow against your cash value with Universal Life & Whole Life policies, but it’s usually not a great idea. You’re basically paying interest to borrow your own money.

You can use some of the built-up value to offset premium payments with some Universal Life policies. You also have surrender value with policies that build cash value. This comes into play if you give up the policy, at which point the insurance company will cut you a check for the difference between your cash value and any surrender charges and fees. Typically, this scenario does comes with substantial surrender fees.

This might sound pretty good, but there are trade-offs. High management fees for one. Not being able to truly access your “forced savings” unless you surrender (ie. cancel) the policy. And less then optimal rates of return, when compared to investment vehicles like a 401k or an IRA (Roth or traditional).

Even when investing with a lower-risk strategy, like a conservative mutual fund (whether inside a 401k/IRA or not), your returns will almost always be better than that of a life insurance policy.

I don’t recommend using life insurance as an investment vehicle. In most cases, a term policy is the easiest and most affordable way to cover your insurance needs. A separate vehicle to handle your investment efforts will usually give you better returns and more control. If you only invest the difference between the cost of the term policy and the cost of the UL or WL policy into it’s own vehicle the difference in cash accumulation will be staggering.

That being said, there are valid reasons why someone might opt for permanent life insurance, but simply investing should not be one of them. Permanent life insurance is often ideal for estate planning, or funding a special needs trust for a family member who cannot be self-sufficient.

Keeping it a secret

Life insurance is not something you buy and stash away without telling anyone. You should make your beneficiaries aware that you have life insurance. They need to know that they are to receive the death benefit of your policy if you die. They also need to know the specifics of the policy and have access to it.

Your beneficiaries, or an appointed trustee if your insurance is held in a trust, has to file a death claim in order for the insurance company to pay the death benefit. Imagine paying for life insurance year after year to protect your loved ones and they never get that money because they don’t know it’s there for them.

Now, insurance companies are compelled to look into potential deaths when a policy lapses and notices to the insured go unanswered. But who knows how long that could take and how much real effort goes into that research. The point is, someone needs to know that you have life insurance and what to do when you die.

Need help avoiding any of these mistakes?

Let me help you avoid the top 10 life insurance mistakes! You can either click the Request a Quote button below and complete a quick form or send me an email to start the conversation.

During a free consult, I’ll gather information about your health and lifestyle. That allows me to pre-qualify you so that I can look at the right insurance policies. That means carriers that will look at your application in the most favorable light.

Your unique level of risk will be considered differently against each insurance company’s underwriting guidelines. You’ll improve your odds of approval by applying with the company who’s the best fit for your situation.

My ultimate goal as an independent life insurance broker is to help my clients obtain the right coverage. Not only at the best price available, but with the appropriate insurance company for their unique situation and level of risk.

I will never suggest that you apply for the cheapest option if I believe that for one reason or another you will not qualify for that specific insurance policy.

Life insurance is by no means a one size fits all purchase. Reach out today and let’s discuss your options!

-Danny Gallant
Life Insurance Broker