The Biggest Life Insurance Mistakes and How to Avoid Them

financial advisor

By Joe Globensky, RFC®

life insurance mistakes


September is Life Insurance Awareness Month.  And while we don’t limit our life insurance conversations to just this month, we want to share some of the biggest life insurance mistakes that we see and help you avoid them.

Life Insurance Mistake #1: Purchasing Too Little

It takes a big death benefit to replace a family breadwinner’s monthly income if his or her paycheck suddenly stopped – more than most people realize.

For example, a $500,000 term life policy might sound sufficient, but if you earn $50,000 a year, that death benefit would only replace your income for 10 years.

To ensure that your family would be able to maintain its current standard of living, you’ll need to project your expenses.  Your policy should cover your lost income and potentially your mortgage, funeral costs, and college tuition for your kids.  In addition, there may be other expenses you anticipate, such as braces for your son or a wedding for your daughter.  Here’s an article and calculator that may help you with this.

While Social Security, pension plans, annuities, and other guaranteed sources of income may sustain your surviving spouse in retirement, keep in mind that those funds may not be available to them for many years.  Life insurance can potentially help fill the gap until those income streams kick in.

Life Insurance Mistake #2: Relying on your employer-provided policy

Many employers offer group life insurance as part of their benefits package, which delivers an added layer of financial protection. But for most employees, it’s not enough.

By the time you leave your job, you may be several years older and potentially less healthy, making it far more difficult to get affordable coverage on your own.  Also, group insurance is often more expensive, and the cost tends to increase as you get older.

Life Insurance Mistake #3: Purchasing Too Much

This life insurance mistake is less common, but it does happen, especially to buyers with inconsistent incomes.  An agent might “up-sell” you on more coverage than you need, and you may struggle to afford premium payments.  Conversely, your plans may change, or you may meet other financial obligations sooner than you expect, making a larger life insurance policy unnecessary.

Fortunately, most insurance companies will let you reduce your coverage amount.  It’s a good idea to find out upfront if your carrier allows flexibility here.  For instance, some may allow one or two late premium payments before your policy lapses, or let you downgrade for reduced benefits.

Life Insurance Mistake #4: Waiting too long to buy

Perhaps the most common life insurance mistake is waiting too long to buy.  Because age is one of the biggest factors that affects premiums.  Generally, the younger you are, the cheaper your insurance will be.

By holding out you also run the risk of developing a serious health condition before you buy, which would render future premiums far more expensive, or leave you uninsurable.

Life Insurance Mistake #5: Getting the wrong type of policy

Both term and permanent life insurance can protect your family from financial risk, but they are very different tools.  If you pick the wrong policy, and many people do, you could leave your family vulnerable when they need protection most.

Term life policies provide coverage for fixed periods of time – often 10, 20, or 30 years. Since there is no cash-value accrual, they are generally far less expensive than permanent policies.  If you die before the term expires, your beneficiaries get a death benefit, generally tax free.  If you outlive the term, most policies allow you to continue coverage, although at higher premiums.

Permanent life insurance, such as whole or universal life, guarantees a death benefit to your heirs when you die if you make your required premium payments.  They also have the potential to build cash value that can be accessed during the policy owner’s lifetime to supplement retirement income, pay for college tuition, or any other reason.

Life Insurance Mistake #6: Assuming it’s 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 2020 Insurance Barometer Study by LIMRA and Life Happens.

More than half of the survey respondents estimated that a healthy 30-year-old would have to pay $1,000 a year or more for a term life policy with a $250,000 death benefit.  However, the average cost of such a policy is about $160 a year – or about $13 a month, according to the study.

Life Insurance Mistake #7: Not shopping around for the best rate and policy

Life insurance quotes for the same coverage vary widely by company.  The price for a 20-year, $500,000 term life policy for a healthy 30-year-old nonsmoking man can range from $244 to $655 a year, according to NerdWallet research.

Besides comparing prices, it’s also important to check the financial strength rating of any company you consider.  You want the strongest possible ratings to make sure your company will be able to pay out an eventual death claim.  Rating agencies such as A.M. Best provide financial strength ratings.

Need More Information?

If you think you need life insurance or just want to evaluate your current coverage, we’d like to talk to you about it.  At Connections Financial Advisors, we have access to dozens of highly-rated life insurance carriers and can help you secure a policy that meets your coverage needs, as well as your budget.  Call us at (217) 605-8130, send us an e-mail, or check us out online.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice.  This article is intended to assist in educating you about insurance generally and not to provide personal service.

Guarantees are based on the claims-paying ability of the issuing company.

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