Les Masterson | Editor
Aug. 26, 2022
Buying life insurance isn’t as exciting as buying a car or TV, but knowing how to buy life insurance can play a vital role in your long-term financial plan.
How do you avoid pitfalls when purchasing a life insurance policy? Here are 10 common mistakes to avoid when you buy life insurance.
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1. Assuming That Life Insurance Is Too Expensive
You’re not alone if you’ve put off buying life insurance because you think it will be too expensive. This is one of the most common reasons people don’t have coverage, according to the 2021 Insurance Barometer Study by LIMRA and Life Happens, industry-funded groups.
More than half of the survey respondents incorrectly thought life insurance costs more than three times the actual cost. This misconception is especially an issue for Millennials. Close to half of that age group (44%) mistakenly thought a 20-year term life insurance policy for a healthy 30-year-old costs over $1,000 annually. LIMRA estimates it’s actually about $165 per year.
2. Relying Too Much on Employer-Provided Coverage
Don’t assume your supplemental group life insurance policy through work is adequate. It likely isn’t.
For starters, the death benefit—the amount the policy will pay to your beneficiaries—might not be enough to cover your loved ones’ financial needs if something happens to you.
Group life insurance policies also typically aren’t portable, which means you can’t keep your coverage if you leave your job. That’s why it’s important to have your own policy instead of relying solely on supplemental life insurance.
3. Not Shopping Around for the Best Rate and Policy
Life insurance costs vary widely by company, so don’t limit your search for a life insurance policy to only one company.
“For example, one company’s term insurance product could be more than double that of a competitor’s,” says Erin Ardleigh, founder and president of Dynama Insurance. Get quotes from at least three companies and for different coverage levels.
Even better: Let an independent insurance broker do the comparison shopping for you. Because brokers work with several companies rather than just one, they can compare a variety of life insurance products to find the best rate.
4. Hiding Information from the Insurance Company
When you apply for life insurance, you’ll be asked a variety of questions about your health, your family’s medical history, your driving record, your occupation and even your hobbies. This is part of the process called underwriting that insurers use to decide whether to give you coverage and what rate to charge you. Life insurance underwriting classes, which are used to identify your risk-level, influence how much you pay for life insurance.
It’s important to answer all of the questions honestly. Insurers will verify the information you provide by:
- Asking for your permission to get your medical records and your prescription drug history
- Checking your motor vehicle report
- Using other third party sources
- Possibly requiring you to take a medical exam
An insurer might deny you coverage if it discovers you’ve withheld information on an application. If you do successfully hide something (which can be hard to do), Ardleigh says the insurer might not pay a claim if your death is related to the information you didn’t disclose.
5. Not Being Prepared for Your Medical Exam
The insurance company might require you to take a quick life insurance medical exam as part of your application process. Your height, weight, pulse and blood pressure will be recorded. You’ll also have to provide a urine sample and have blood drawn.
To get the best results, you’ll want to limit salt and alcohol intake and avoid caffeinated drinks before an exam. You’ll want to do everything you can to ensure the best results possible to qualify for a low rate.
6. Assuming Your Less-Than-Perfect Health Will Keep You From Getting Insurance
Don’t assume that you can’t get life insurance or an affordable rate if you have a health issue. Life insurance companies each have their own underwriting guidelines. For example, some may be more lenient about a cardiac condition. Some give better prices to smokers.
An independent insurance agent will usually know which companies likely offer the better rates for any health issues you might have.
7. Buying Too Little Coverage
The more life insurance coverage you buy, the more you’ll pay. That doesn’t mean you should skimp on coverage, though, just to save money.
To calculate how much life insurance you need, consider what financial obligations need to be covered, such as replacing your income, paying off a mortgage and other large debts, and paying for your children’s college education. Then consider what assets you have, such as college savings, to cover these costs. The difference between your assets and obligations is the gap that life insurance needs to fill.
8. Not Understanding What You’re Buying
Understanding the types of life insurance is not a simple task. For starters, understand the difference between term life and permanent life insurance. A term life insurance policy costs less and remains in effect only for a certain period, such as 10, 20 or 30 years.
Permanent life insurance, which may be called cash value insurance, can last a lifetime and can build cash value that you can access while living. Permanent life choices include whole life insurance, which will be more expensive because it offers a fixed rate of return on the cash value and a premium that won’t increase over time.
A universal life policy can be cheaper than whole life but also more complicated because premiums and investment gains on the cash value component can vary. Be sure to ask a lot of questions before buying a policy.
“If you don’t understand it, don’t buy it,” Ardleigh says.
9. Not Getting Financial and Legal Advice
Life insurance should be part of a comprehensive financial plan. If you have an accountant or financial planner, you should be discussing how your insurance needs fit into your financial plan before purchasing a policy.
If you’re not already working with a financial professional, ask friends and family for recommendations.
10. Putting Off the Purchase of Life Insurance
The biggest mistake when it comes to buying life insurance is waiting to buy a policy. Budgets and time can easily push off a life insurance purchase. And don’t wait with the hope that you’ll improve your health, such as losing weight, because every year you get older, and waiting increases the chance that you could develop other health issues.
The younger you are when you buy life insurance, the more affordable it will be. That’s because your age as well as your health affect the rate you pay.
“You’re never going to be as young or as healthy as you are now,” says Faisa Stafford, CEO and president of Life Happens. “The sooner you get life insurance, the sooner you can lock in a low rate.”
Les Masterson | Editor
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