Life insurance is a crucial component of financial planning, providing a safety net for your loved ones in the event of your untimely passing. It can help cover outstanding debts, future expenses like college tuition, and replace lost income so your family can maintain their standard of living.
However, purchasing the wrong life insurance policy can leave your family underinsured or overpaying for coverage they don’t need. Avoiding these common pitfalls can ensure you select the right policy.
Mistake #1: Underestimating How Much Coverage You Need
One of the biggest mistakes is underestimating the amount of life insurance coverage your family requires.
To calculate an appropriate coverage level, consider factors like your current income, outstanding debts (mortgage, loans, etc.), future educational costs for children, funeral expenses, and the income your spouse/family would need to maintain their lifestyle if you passed away. A general rule of thumb is to have coverage equal to 10-15 times your annual income.
For example, if you make $75,000 per year, you may want a policy with at least $750,000-$1,125,000 in coverage. Underinsuring by even a few hundred thousand dollars can significantly impact what benefits your family receives and their financial security.
Mistake #2: Not Shopping Around for Best Rates
Life insurance premiums can vary considerably between insurance providers for identical coverage amounts. Failing to shop around and compare rates from multiple companies is a missed opportunity to potentially save hundreds per year on premiums.
Get quotes from at least 3-5 different insurers, making sure to provide the same personal information and coverage details for an apples-to-apples comparison.
Look beyond just the premium cost to compare each insurer’s financial strength ratings, customer service, policy provisions, and the length of time they’ve been in business. But don’t disregard a great rate – rates for a healthy 30-year-old can differ by 50% or more between the highest and lowest quotes.
Mistake #3: Failing to Read the Fine Print
Life insurance policies are dense, legal contracts filled with definitions, exceptions, and exclusions buried in the fine print.
Not thoroughly reading and understanding your policy document is a recipe for disagreements or denied claims down the road. Pay close attention to sections defining what circumstances would allow the insurer to deny a claim entirely.
Also review specifics like how a beneficiary can make a claim, whether the policy is contestable for a period after issuance, and what charges would apply if you want to terminate early (e.g. surrender fees). Don’t make assumptions – use the policy’s exact definitions and language.
Mistake #4: Buying Unnecessary Riders or Writers
Insurers often promote paid riders or policy add-ons like disability income riders, waiver of premium benefits, or accelerated death benefits when you may not truly need or want them.
While certain riders can provide valuable coverage in some circumstances, they drive up the policy’s premiums unnecessarily in other cases.
Carefully evaluate if riders are worth their cost for your situation and life stage. For example, a waiver of premium rider to cover premiums if you become disabled may be excessive if you already have disability insurance from your employer.
Mistake #5: Providing Inaccurate Information on Application
When completing a life insurance application, you have a legal duty to answer all health, lifestyle, and background questions truthfully and accurately.
Misrepresenting details like your age, medical history, smoking/tobacco use, driving record, or hazardous activities can constitute insurance fraud. Lying on an application puts your policy at risk of being cancelled if the truth is discovered later.
Insurers thoroughly verify applicant information during underwriting. Even innocent omissions can cause a claim to be denied years later if they discover undisclosed medical conditions or other misrepresentations. Be upfront and disclose everything to a licensed agent helping you apply.
Mistake #6: Not Considering Policy Conversion Options
Some term life insurance policies provide options to convert to permanent life insurance coverage down the road. This conversion privilege can be valuable if your insurance needs change and you want lifetime coverage without having to apply for a new policy and go through underwriting again.
Review your term policy’s conversion rules, such as age limits for converting and the premiums permanent policies would have based on your current age and health.
In certain situations like developing health issues, being able to convert without evidence of insurability can allow you to lock in affordable permanent coverage you may not otherwise qualify for.
Mistake #7: Choosing the Cheapest Policy Without Scrutiny
While premiums are certainly an important factor, basing your decision solely on the cheapest quote can be shortsighted. An ultra-low premium may be appealing, but you need to evaluate the financial stability and reputation of the insurer as well.
Ideally, you want a policy from a company with a strong financial rating from agencies like A.M. Best, good customer service reviews, generous policy provisions, and a proven track record of paying claims.
It’s wise to balance premium costs against the comprehensiveness of the coverage and the insurer’s expected long-term viability when your family may need to make a claim in 10, 20 or 30+ years.
Mistake #8: Missing Payment Grace Periods
Most policies provide a grace period (typically 30-31 days) to make a late premium payment before coverage will lapse. However, missing this window can be costly and create major headaches.
If your policy term ends up lapsing due to nonpayment, the insurer may require you to go through the full underwriting process again to reinstate coverage – including new medical exams and evaluation.
Setting up automatic premium payments can eliminate this risk entirely. If you do happen to miss a payment, be sure to get it taken care of promptly before the grace period ends.
Mistake #9: Not Periodically Reviewing Life Insurance Needs
Your life insurance needs can change significantly over time with marital status changes, an increasing family, a new mortgage, children becoming self-sufficient, or many other life milestones.
Failing to periodically review your current coverage can leave you dangerously underinsured and your loved ones’ financial futures at risk.
Revisit your policies every 3-5 years and after major life events. You may need to increase coverage during your working years, then downsize policies when your income isn’t as vital and kids are grown. Routinely auditing needs prevents you from paying excessive premiums while ensuring your loved ones are protected.
Mistake #10: Working With an Uncredentialed Agent
When navigating the complex life insurance landscape, it’s wise to enlist guidance from an experienced professional agent rather than attempting to navigate policies on your own.
However, be cautious about who you work with. In most states, agents must be appropriately licensed and credentialed to sell life insurance products.
Do your due diligence in verifying any agent’s licensing, credentials, continuing education, and professional background. An unlicensed or unethical agent may misrepresent policies or push inappropriate coverage for their own commission rather than your best interests. Work with reputable professionals who specialize in life insurance.
Avoiding these 10 common pitfalls when purchasing life insurance can ensure you end up with the right amount of coverage from a reputable company, without overpaying or leaving your loved ones underinsured. Take the time to understand your needs, compare policies and rates, work with qualified agents, and periodically revisit your coverage as life circumstances change.
Purchasing appropriate life insurance gives you and your family peace of mind in knowing they’ll have a financial safety net in place. Don’t let an easily avoided mistake leave your loved ones unprotected. Review your policies today and seek guidance if you have any uncertainty about your coverage needs.