Selecting the right life insurance policy is no laughing matter. We all need the proper coverage. (Yes, even you single person unless you already have funding for your funeral lined up. I bet you don’t, though.) Yet, when we review policies from non-clients (people looking for our help), many of them have made some devastating life insurance mistakes.
These mistakes aren’t in the basic realm of life insurance mistakes such as the “I don’t have enough death benefit coverage” mistake. (Purchasing an additional policy fixes this mistake.) These mistakes are serious, made for one reason or another. The mistakes we are going to discuss are devastating life insurance mistakes that you generally can’t recover from.
In this article, we discuss the 5 devastating life insurance mistakes people make.
As mentioned, these are not the easy-fix type problems. These are the nearly irreparable.
Let’s get into the 5 devastating life insurance mistakes. Of course, if you have any questions, feel free to contact us anytime.
Devastating Life Insurance Mistakes #1 – Shopping Around
You are not milk.
What do I mean by that?
Purchasing life insurance, or any insurance, is not like buying milk or shopping for a car. You can’t stop at dealer XYZ and see what the price of a car is, and then go to dealer ABC and see if you can get the car for $5,000 less. You can’t go to the store and try to get milk on sale.
Purchasing life insurance doesn’t work that way. Life insurance isn’t on sale.
The states and the carriers set the premiums. Agents have no bearing or influence on them. They can’t discount, and agent incentives to you are against the law.
People tell me they are shopping around. When I hear that, they really aren’t serious. They sort-of are, but only at the right price. Then, they procrastinate and nothing happens. That leaves your loved ones exposed to potential, financial pain upon your unexpected death.
When you shop around, you treat life insurance as though it is a commodity like bread, gas, and milk. Why is shopping around a mistake? You might be missing on valuable, additional benefits important to you. You erroneously equate the value of life insurance to the premium cost only. Invariably, you equate yourself as a commodity like milk or bread, but you are not milk or bread.
How To Avoid Mistake #1
The key to avoiding mistake #1 is to find a dedicated and honest life insurance agent who works in your best interests only. Knowledgeable, honest life insurance agents are worth their weight in gold. Their value is priceless. I am sure you can agree that when you find someone who works only in your best interests, you don’t want to lose that person. You value his or her knowledge. Great agents continue service long after the application. They help you during the underwriting process and provide service long after the transaction.
This agent should have access to many carriers to match your specific needs to the right life insurance policy. Let the agent do the shopping for you. If he or she has access to over 40 insurance carriers, there will be one carrier policy that meets your situation and budget.
Why is shopping around yourself a devastating life insurance mistake? Because you are only focused on price, not the overall value. Most times, you will select the lowest cost option, thinking it is the right one for you. Years later, you find out the policy you purchased is the most expensive in the long run. How does this happen? A person contacted us about the following situation. She found a policy for her husband. It was easy to apply. Upon his death, however, the policy did not pay a death benefit. Why? Because the policy had a 2 year waiting period. He died within 2 years of the policy issue. As you can see, by focusing on cost only, you just made a devastating, long-term expensive mistake.
Devastating Life Insurance Mistakes #2 – Not Accepting The Policy
When you apply for a life insurance policy, there is no guarantee you will receive the premium rate quoted. (Unless you applied for a guaranteed-issue policy.) In order to obtain the lowest cost policy for your given situation, you need to be honest and disclose any health conditions or lifestyle risks. Then, agents have the ability to design an accurate quote (but still an estimate). Generally speaking, you also need to go through medical underwriting which includes a paramedical exam, height and weight check, blood/urine sample, and potentially additional questions. If you go with a non-medical life insurance policy, you will pay a higher rate because you avoid the paramedical exam.
What if you receive an offer that is higher than quoted? Easy answer. Take the policy. It is important to remember who is the recipient of this life insurance money. The recipient is your wife, husband, children, or another loved one. Why would you sacrifice their financial security by not accepting the policy?
You can always accept the policy and then work with your agent (or another one) to work on improving the policy. Most times, we have found, people decline the policy, then procrastination sets in. Months and years might go by. Suddenly, they need life insurance, and but they have the inability to purchase a policy because they just had open heart surgery or some other significant health condition. They jeopardized their family’s financial security because they did not want to pay a higher premium.
How To Avoid Mistake #2
A premium increase isn’t that much more when you really analyze it. For example, an additional $10 per month in premium might seem a lot, but it is only $0.30 per day. We can find $0.30 per day, right?
And, if you are a smoker or use tobacco, nearly all carriers will drop you to non-tobacco rates once you are clean for a year.
Most of us have health conditions which make life insurance premiums higher compared to the premiums of a healthy person. This is where a qualified agent helps. He or she can review your situation and then match a policy at the lowest cost possible.
The way to avoid mistake #2: see the big picture. A higher premium offer means you are still insurable. If you question the offer, accept it, but work with your agent to find a better solution, if warranted.
So, just take the policy. Your loved ones are connected to that life insurance policy.
Devastating Life Insurance Mistakes #3 – You Are An Expert
We are all experts at something. If you are a hair stylist, you know how to style and cut hair the right way for your client. If you are a mechanic, you have a skill set unmatched by many people. Same if you are a physician, dentist, veterinarian assistant, a teacher, and on and on.
Life insurance agents are experts, too. Sure, determining your need is not rocket science. We put together an easy, and accurate, life insurance needs analysis. And, you can go anywhere online to find a price. The mistakes we have seen are from people who scan the online quotes, see a few, and purchase a policy.
They don’t really know what they purchased until years down the road. See our true story from earlier. What if you are diagnosed with cancer and your term policy is up next year? Wouldn’t you like to know if your term policy is convertible to permanent insurance without underwriting evidence? I think that would be an important option, especially if you have a family. You wouldn’t know this if you just scanned a few carriers and selected the lowest cost option.
How To Avoid Mistake #3
There is more to the life insurance cost and coverage determination. Good life insurance agents know the underwriting process and benefits of each carrier. They educate you on your needs, your family, and that their recommended carrier is the right one for you. How to avoid mistake #3. Simply, find an honest life insurance agent. We discussed the qualities of a good life insurance agent in a previous post.
It’s true; we do offer a link to apply life insurance yourself that takes 10 minutes. We designed the link for those who really don’t want to bother with an initial call to a life insurance agent. But, the insurance results are only as good as the information you put in. If you have moderate to severe health conditions, then this option isn’t for you. It is best to contact us so we can find a policy that meets your situation.
Devastating Life Insurance Mistakes #4 – You Select The Wrong Type Of Life Insurance
Did you know there are many types of life insurance? The types include:
- whole life
- fixed universal life
- indexed universal life
- guaranteed universal life
- variable universal life
- single-premium life insurance
And, probably more.
Many people get this wrong. They don’t understand how the types of life insurance work. They heard from friends that whole life insurance is bad, and maybe it is. However, there are many situations where whole life insurance works, and is needed.
Some permanent-type life insurance policies (like whole life) offer cash value that can be used in a myriad of estate planning situations. Or, used to generate income sheltered from income taxes.
Additionally, many carriers now offer living benefits on their life insurance. The addition of living benefits, in my opinion, makes permanent life insurance a more desirable financial planning tool.
If you mess up here, you can potentially mess up the future for your loved ones. Let’s say you have a disabled child who will need care long after you are gone. Generally speaking, a permanent type of life insurance (like whole life) works better here than term.
How To Avoid Mistake #4
You always have to do some homework. That homework might be contacting a qualified agency who works in your best interest always (like us). However, remember this adage about term versus whole life insurance.
Term is good IF you die. Whole life is good WHEN you die.
Let’s say you just want life insurance to cover a mortgage and provide for your family in case of your unexpected death. Then, term life insurance works here. However, if you are protecting a specific event that will occur upon your death, say your funeral, then whole life insurance works.
As we said before, contact us if you have any questions.
Devastating Life Insurance Mistakes #5 – Your Benefit Does NOT Pay Out
Here’s a serious one that falls into the devastating life insurance mistakes bucket.
You spend months and years paying premiums. Upon your death, however, the policy doesn’t pay a benefit.
There are a number of reasons why.
One could be the 2-year suicide exclusion that exists with nearly every policy issued in the US.
Another could be an explicit exclusion written into the policy. Let’s say you are an avid skydiver. You truthfully state that on the policy. Your carrier excludes death by skydiving. Well, your loved ones won’t receive a benefit if you pass away from skydiving.
However, a common reason a carrier doesn’t pay the death benefit is the lack of insurable interest.
What is insurable interest?
It is the foundation of any insurance, including homeowners and car insurance. It means you, as the beneficiary, face financial hardship upon the death of the insured. (Such as an object like a home or a loved one like a spouse.)
If the carrier deems no insurable interest exists, it will not pay the benefit.
You don’t want that to happen, right?
How To Avoid Mistake #5
First thing: be truthful on the application. Every policy has a 2-year contestability clause as well as a material representations clause. Carriers can hold and deny the death benefit if they feel fraud occurred.
Additionally, be aware of the insurable interest condition. Your beneficiary must be negatively impacted financially upon your death. This means strangers aren’t beneficiaries.
Here’s a common situation in which carriers will hold a death benefit: divorce.
If you and your spouse divorce, an insurable interest no longer exists. You will need to consult the courts and have a divorce decree which requires you as the beneficiary. If no divorce decree exists, the death benefit goes to the insured’s estate and likely no payout to you.
Now You Know The Devastating Life Insurance Mistakes And How To Avoid Them
Have you made any of these devastating life insurance mistakes? If so, there is still time. Contact us or use the form below. We only work with your best interests and are happy to help you and your family.