Common Mistakes People Make When Buying Life Insurance And How to Avoid Them

Introduction: Why Life Insurance Is Easy to Get Wrong

Life insurance has become much easier to purchase, with certain insurers even letting you skip the medical exam. Unfortunately, misinformation and myths abound. A lot of mistakes are completely avoidable, you just need to know the common pitfalls and missed opportunities.

In this guide, we will cover the 11 biggest life insurance mistakes people make and how to avoid them.

Mistake #1: Not Buying Enough Coverage

Many people pick a random round number when deciding on the coverage amount. $100K or $250K sounds like a great payout for low premiums, but life insurance shouldn’t just sound good on the surface. It’s important to calculate how much coverage you actually need for your finances and lifestyle.

Consequences

If you don’t buy a policy with a sufficient death benefit, your family may run out of funds within months after your death. The reality is that most people with dependents are only comfortably protected if they have coverage for 5 to 10 times their income. This is particularly crucial for people who are the sole or major income provider of the family.

How to calculate the right coverage amount

Consider debts, childcare, education, future goals, and current savings. Not everyone has the same coverage needs. Some people might be satisfied with a small, $10,000 life insurance policy. Others might even need $500,000 or $1 million.

Check out our Guide to Determining the Right Coverage Amount for more detailed information.

If you have a term life insurance policy, reassess your needs before renewing for the next term. Many people find themselves requiring a different coverage amount depending on their llfe stage and number of dependents.

Mistake #2: Delaying Because You Think You’re Too Young to Need It

There are a lot of reasons that keep young adults from buying life insurance.

But the delay in life insurance could be hurting you. Here are the main problems.

• Life insurance gets more expensive with age
• You can become uninsurable after major health issues develop
• Coverage locked in early = lower premiums
• You get more decades of savings and value

Life insurance for young adults

Do you truly need to pay a monthly premium for life insurance even if you’re in your 20s or 30s? This is a choice only you can make for yourself. Consider your finances and whether your dependents would require the financial support if you unexpectedly pass away. Consider the value you can accrue over time if you opt for a whole life or universal life insurance policy with cash growth.

Buying when you’re young and healthy nets you the best rates. Insurance companies expect people who are older to have significantly greater mortality rates, which would cost them money.

Start with affordable term life coverage if budget is tight. Ethos is our top recommendation for life insurance.

Mistake #3: Assuming Job-Based Coverage Is Enough

Employer life insurance plans are great for their convenience, but they are rarely enough coverage. Employer plans tend to only offer 1 to 2 times the salary, and only if you keep the same job. If you lose your job or change employers, it is difficult to continue the life insurance coverage.

Employer life insurance plans are also generic. You don’t get to customize the policies and lose out on the long-term financial values of whole life insurance policies. Think about it: companies use health and life insurance as employee retention strategies. It’s good enough to achieve that, but not good enough to guarantee your loved ones’ financial security in case the unthinkable happens.

How to approach employer life insurance

It’s best to treat generic employer life insurance as a nice bonus. But supplement with your own individual policy once you can comfortably afford it.

Mistake #4: Misunderstanding Term vs. Permanent Life Insurance

The two major types of life insurance are term life and permanent life. There is a lot of misinformation around both, because people often end up buying permanent life insurance when they only need term (or vice versa). And if you lock in the wrong type of life insurance, it could be so costly that you only realize decades after–or never, if your beneficiaries are the ones who are struck by that realization.

What you need to know about the difference

Permanent life insurance needs to be maintained in force essentially for the rest of your life. If you miss payments, you can lose coverage and incur penalties. The advantage is that you can earn numerous tax-advantaged cash advantages through permanent life insurance policies. Locking in a lower permanent life insurance premium early in life can save you money in the long run, while providing peace of mind that cannot be monetarily judged.

On the other hand, you have term life insurance. You can choose a term that suits your needs and goals for a certain life stage. It’s less stress to purchase because it’s less committal. Term life is generally better if you want income replacement during your working years and have dependents. Permanent life insurance is if you are looking for longer protection and more tax advantaged value.

Is permanent life insurance worth it?

Depends on your financial goals and situation. Do you want extra value from your life insurance that isn’t just the death benefit? Do you have lifelong or legacy planning goals? Permanent life insurance can be better for estate planning and long-term value.

When should you buy both?

It may sound surprising, but in rare situations, term and permanent life insurance policies can work together to provide extra financial security for families. This tends to make more sense for families that have minor children who absolutely require more financial support if the parents pass away while they are still young. The term life insurance can offer extra protection during these earlier years, while the whole life policy ensures permanent, lifelong value.

Mistake #5: Forgetting to Review or Update Beneficiaries

Keep your beneficiaries up to date! Too often people forget about life insurance policies. Even if you list the heir in your will, the actual policy beneficiary designation overrides the details within the will.

After major life events or every 3 to 5 years, review your life insurance to ensure it still aligns with your life situation and the rest of your estate plan.

Common issues with beneficiary designations

• Ex-spouses still listed (some policies may kick the ex-spouse automatically upon a divorce)
• New children or grandchildren not added
• Names incorrect
• Deceased beneficiaries
• No contingent beneficiaries
• Wrong or missing beneficiaries for employer life insurance plan

Mistake #6: Choosing the Cheapest Policy Instead of the Best Fit

Like most things in life, it’s ideal to find a balance between cost and quality. An ultra-cheap policy is great if you require an affordable safety net. However, it may lack riders, flexibility, or long-term options. There may be something in the policy restrictions that is unhelpful. Because of this, the life insurance premium should not be the only decision factor when comparing policies.

So what should you compare when looking for the best life insurance policy?

• Coverage amount (and if it can be altered in the case of flexible premium policies)
• Extra benefits (e.g. no medical exam necessary)
• Riders to customize coverage
• Conversion options (if you can convert from term to life)

Mistake #7: Overlooking Riders That Could Protect You More

Life insurance riders are used to tailor insurance policies so they can provide better value for you and your loved ones. The ideal riders depend on what you’re looking for from the life insurance policy. Sometimes, it makes more sense to get the coverage from your health or travel insurance instead; other times, life insurance riders are better.

Valuable life insurance riders

Critical illness: Provides financial support in case you are diagnosed with critical illnesses, such as cancer or stroke.

Waiver of premium: Pauses premiums if you get disabled or otherwise cannot pay premiums due to qualifying emergencies.

Accidental death benefit: Gives an extra, large lump sum of money if you die of an accident death.

Long-term care: Lets you access money and benefits to pay for long-term care (LTC) costs, such as hospice and caretaking. Useful due to constantly increasing costs of long-term care.

Child riders: Covers your children at a lower additional cost.

Evaluate your individual risks and lifestyle needs when looking at available riders.

Mistake #8: Failing to Calculate Real Needs

Life insurance is… tough, sometimes, to purchase. Many find it morbid, or stressful, no matter their life stage. But if you want the best protection for your loved ones, and want to get the most out of the death benefit and policy features, then you need to calculate based on real obligations and goals.

Consider, when applicable:

Mortgage: How much is needed for your family to still afford mortgage? Not having enough can mean losing the home.

Private loans: Any loans, especially co-signed ones, could result in debt on your estate and reduced inheritances for your beneficiaries. Your loved ones may be on the hook for certain loans.

Childcare: How much it costs to take care of the child varies based on lifestyle, health, and other factors. Calculate your estimated annual childcare costs. Future tuition can also be considered.

Aging parents: Elderly parents or other older dependents can require long-term care costs, such as hospice. These are much more expensive than you’d expect.

Inflation: Don’t forget to factor in inflation.

How to calculate

You can use a coverage calculator since it is free. Working with a financial advisor is ideal because they can help you discern your financial obligations and how to meet them.

Mistake #9: Ignoring Exclusions & Waiting Periods

Absolutely read your policy carefully before purchase. Ask life insurance representatives about renewal rules, special exclusions, and other things you should know about your life insurance policy.

Waiting periods

Not all types of death pay out. If there is a “suspicious” death during the two-year contestability period, life insurers can deny your loved ones the payout.

There is also typically a suicide clause that prevents payouts if suicide occurs during the designated period of time (usually 2 years after initial purchase).

Misrepresentation dangers

If your life insurance company believes you have misrepresented key information, such as withholding health issues or smoking habits, they can deny the death benefit.

Exclusions for high-risk activities, criminal activity, and more

Some deaths are excluded. For example, if you are engaging in criminal activity and die during, it may lead to the life insurance claim being denied. Skydiving and other high-risk activities may also be excluded.

Slayer rule

If you die in a suspected homicide, the life insurance payout can be delayed as investigations go on. If you die because of an heir, that heir may be excluded from the death benefit.

Mistake #10: Missing Payments or Letting Coverage Expire

Even if you buy permanent life insurance, you still need to keep it in force. Any lapses can result in loss of protection, so if you die unexpectedly during this time, there would be no death benefit. The policy would essentially be “wasted”.

Reinstating a lapsed policy can be costly or denied. To avoid lapses, try these strategies:

• Set up autopay
• Choose a realistic premium and coverage amount
• Review situation between life insurance terms to adjust if needed

Mistake #11: Never Revisiting Your Life Insurance Plan

Life insurance coverage needs change when major events happen in life, such as:

• Marriage
• Divorce
• Childbirth
• Home purchase
• Job change or loss
• New business
• Retirement
• Health changes
• Relationship changes

Review your policy every 3 to 5 years to ensure the beneficiary, policy coverage amount, and other details align with your latest situation. Adjust coverage as needed.

Conclusion

Take control of your life insurance plan. With careful reading of the fine print, periodic reviews, and coverage calculations, you can truly protect your loved ones.

The policy you choose matters. You can find affordable, reliable life insurance policies through Ethos today.