We all make mistakes. Mistakes give us a chance to learn and grow. In many cases, making a mistake is harmless.
However, I’m sure you will agree, there are situations where making a mistake could be harder to recover and have negative, long-term effects. Making a mistake with life insurance falls in this category and can have similar results.
In this article, we discuss the top 10 life insurance mistakes and how to avoid them.
Below are our top 10 life insurance mistakes, in no particular order.
Life Insurance Mistakes: Beneficiaries
(1) Not Choosing The Right Beneficiary
A beneficiary is the person, persons, or entity (like a charity) which will receive the life insurance death benefit upon your death. Does it sound easy to select a beneficiary? Most times. Typically, a primary beneficiary is your spouse or children. A beneficiary must have something called an insurable interest. In layman’s terms, that means someone that will have financial ruin upon your death. This interest is bound by love and/or a business relationship. Think about your spouse or children. If you own a business, your business partner.
Selecting a beneficiary can be harder in some situations. Here is a real-life example: Mary loves her children, but Max, her youngest, is having trouble with securing a job and has been in and out of rehab for alcohol abuse. Mary has all her children including Max as the beneficiary. Do you think she should?
No, she should not. He isn’t a good candidate to be a beneficiary. Outside the scope of this article, he could receive death benefit proceeds controlled by a trust and trustee.
Moreover, it is important to tell the beneficiary about the policy. Keeping the policy silent is a disservice to your beneficiary. If you die without telling your beneficiary about the policy, the policy could go unpaid. Additionally, your beneficiary may need the death benefit to assist with your estate. So, don’t keep your policy a secret.
(2) Not Checking Your Beneficiary Designations Every Year
Most times, your beneficiary designations are in good order. However, problems can occur when a couple divorces or the primary beneficiary dies before the insured, leaving the contingent beneficiaries next in line.
Here are some real examples of how this can be a problem.
You divorce your husband, David, but he keeps you as primary on his life insurance with no change of the beneficiary status. (Remember the insurable interest rule.)
Upon his death, you are saddened to learn that the money you thought you would receive has been suspended by the carrier. Why? It is an improper beneficiary designation. (Note: there are specific rules that allow a divorced couple to remain as primary beneficiaries. One of the documents that assist in this process is the divorce decree.)
Life Insurance Mistakes: Carrier Selection
(3) Not Selecting The Right Insurance Carrier
Have you ever been to a supermarket to purchase one item, but you walk out with several other items? Purchasing life insurance is kind of like that. You don’t want to impulse-buy, but you need to shop around for the right carrier. You go in thinking any life insurance carrier will work for your situation. However, that is rarely the case.
The “right” carrier isn’t necessarily the one with the lowest premium. It is the one that can meet your needs and goals. Selecting the right policy is especially important for people with health conditions or who have hazardous occupations.
Life Insurance Mistakes: Application Process
(4) Not Being Truthful On The Application
Did you know the best rates are found by matching the right insurance carrier to your specific situation? An honest application process will give you the best chance of obtaining life insurance at an affordable rate. So, let’s say you had cancer 7 years ago. You need to disclose that. Moreover, you need to disclose your condition history in detail. You also need to disclose any hazardous extracurricular activities, too. What happens if you don’t?
If the underwriting team, through the MIB and other reports, sees your condition without your disclosure, the underwriting team will contact you for more information. We will caution you that withholding information doesn’t put you in the best light. You want underwriting to be nice.
Let’s say you sneak one by. Are you free? Maybe. The life insurance contract has an incontestability clause in which the carrier can review your file for two years. If you were to die during this timeframe from the illness or activity you never disclosed, chances are your beneficiaries will not receive the death benefit. Instead, they will receive your premiums back with a modest interest.
A word to the wise: be honest on your life insurance application. We at My Family Life Insurance have matched affordable life insurance with every health condition and situation imaginable.
(5) Not Purchasing Enough Coverage
You need to make sure that your heirs are taken care of upon your unexpected death. Far too often, people don’t have enough life insurance.
In order to determine what “taken care of” means monetarily, add up any liabilities or responsibilities that you would fund. Many families include college savings and home mortgage payoffs in their death benefit. Additionally, many families add a payment factor for the surviving family to live on. This payment factor is your gross salary multiplied by a number of years. For example, if you make $50,000 annually gross, and want your surviving spouse to live off this for 5 years, you would add $250,000 to the death benefit.
You would then add any liabilities you want extinguished upon your death, like a mortgage or college debt.
Determining your life insurance coverage is not a hard process. We’ve outlined the steps in a very easy life insurance needs analysis tool.
Life Insurance Mistakes: Research
(6) Waiting To The Last Minute
Charles Dickens wrote that procrastination is the “thief of time”. I think he was referring to the life insurance research process 🙂
If you need life insurance, it is best to buy it now and not tomorrow. Why?
Well, rates are based in part on your age and health. Do you think you will have the same health a year from now?
Maybe…maybe not. For one thing, you’re a year older. You’ll pay a higher premium for that alone.
Rates increase as we age and as we develop health conditions. You are most likely the most healthy right this instant. So, bookmark this page and apply now, 🙂 .
You can search for estimated rates here. Just input your information as required and the available insurance plans populate.
(7) Picking Term Insurance When You Need Permanent Insurance, And Vice Versa
If you have read our articles, you know we advocate for term life insurance first.
However, there are cases where permanent insurance makes sense. One common reason is to establish a burial/funeral expense fund. This will give your heirs peace of mind knowing the money is there. It also allows them to participate in the bereavement process, uninterrupted by these distractions.
Here’s a mantra the helps me with clients. Remember that term life insurance is appropriate IF you die. Permanent insurance is appropriate if you want to provide a death benefit WHEN you die.
Understand this, and you should have no problem determining the right one for you. Do you want life insurance in case of your unexpected death? Therefore, term is appropriate. Do you want to have coverage that lasts a lifetime with living benefits? Then, permanent coverage could be more useful.
(8) Not Purchasing The Right Term
Let’s say you are 30 years old. You did a good thing and purchased an adequate amount of term life insurance on your life. If something were to happen, your surviving family would be adequately covered. However, you made a big problem.
The problem is that you purchased only a 10-year term! If you die at age 38, then your family will receive the death benefit. But, what if you die at age 41? Your family receives nothing!
Additionally, what if you develop cancer and want to reapply? Well, your life insurance options are much more limited. (Still possible, but harder…and likely more expensive.)
Make sure you purchase the right term for your unique situation. Moreover, if you feel you need life insurance (which you probably do), you will need to go through the underwriting process.
Life Insurance Mistakes: After The Policy Issued
(9) Forgetting To Pay Your Bill
An obvious one, but more and more people forget this as the busyness of life becomes busier.
While this scenario doesn’t happen much with automatic monthly withdrawals, it does with payment options such as quarterly, semi-annually, and annually as these payments frequencies usually are direct invoice. Some people like the direct bill for more “control” of who is drafting what out of the checking account.
I get it. However, life insurance isn’t the Netflix subscription. I think you’ll agree if you miss your Netflix payment, the sky isn’t falling.
But, it can if you miss a life insurance payment. What if you are uninsurable and miss that payment?
Our suggestion: keep an eye all the time for unexpected mail and communication from your financial institutions, including those from your insurance carriers or agent.
All states allow a grace period, usually 31 days, in which you can pay late with no penalties. Outside of this, have to start the entire application process, including paramedical exam, over again. That stinks if you developed a significant health condition or became uninsurable.
Out of all the life insurance mistakes, missing a payment has to be one of the most common. Don’t let it happen.
(10) Not Understanding The Extra Riders
Riders can be useful in customizing a life insurance policy to your specific situation. Be aware, however, to overindulge with these riders. They cost money. There are some we like and others we don’t. For instance, we don’t see much value in return-of-premium riders. We do, however, like some critical illness riders. It all depends on your unique situation.
Why did we include riders in this section? Because you want to be careful of buyer’s remorse.
Now You Know About The Top 10 Life Insurance Mistakes
We hope you found this article on life insurance mistakes useful. Feel free to reach out to us if you have any questions or concerns. If you are early in the life insurance research process, use our easy life insurance calculator for help. It will walk you through step-by-step on what you need to do. In any case, we are here to help and work only in your best interest. Contact us today or use the form below for a confidential and informative discussion on your unique situation and how we differentiate ourselves from other agencies.