What life insurance mistakes should I avoid?
Buying life insurance is one of the most important purchases you will make, especially if you have a family. According to the 2018 LIMRA life insurance barometer study, it was discovered that over 40% of Americans don’t have any form of life insurance. A third of those who do have coverage have no more than $100,000.
These numbers are concerning. What’s preventing people from purchasing such an essential financial product? Is it cost? The unknown buying process?
Our theory is that life insurance can be intimidating and complicated without an expert in your corner, and this means that people make mistakes when they shop for it.
That’s where we come in. Let’s discuss common life insurance mistakes to avoid while you’re looking for coverage.
Mistake # 1 – Assuming Life Insurance is Too Expensive
First of all, people with no life insurance think it’s three times more expensive than it actually is. In reality, there’s a good chance that you’ll be paying less for a term life insurance policy than your cable bill.
Instead of just assuming it’s too expensive, run a quote. This is the most common of insurance mistakes to avoid.
» Compare for yourself: Term life insurance quotes
Mistake # 2 – Relying on a Group Insurance Policy
Group life insurance is a great benefit to take advantage of through your employer, but you can only collect on your group life insurance policy if you die while you’re still working. If you lose your job or get into an accident that puts you out of the workforce, however, all that coverage vanishes.
Additionally, most group life policies offer less than $100,000 in coverage. This money will definitely help your family pay for a funeral and a few end of life expenses, but if you have a mortgage or want money to help put your children through college, it probably won’t be enough.
Keeping a personal term life insurance policy that you can take with you as you change jobs or leave the workforce will ensure that your family isn’t stuck paying for everything out of pocket, and will give you a nice boost in coverage if you do die with a group life insurance policy.
Mistake # 3 – Procrastinating
One of the indisputable facts of the life insurance industry is that the younger you are, the cheaper your life insurance premiums will be.
As you age, the odds that you’ll develop medical issues increases, and once-minor accidents will begin to be more severe as you get older. It’s not fun to think about, but you’re also inching closer to old age every birthday.
Luckily, term life insurance can still be pretty affordable, even after age 50. If you have the option to pay $20 per month at age 30 versus $72 per month at age 50 for the exact same amount of coverage, however, it makes sense to buy early.
(Prices listed are for a 20 year, $500,000 policy for a healthy male at age 30 and 50)
Reviewing and updating your policy is imperative to ensure it’s in place to carry out your financial wishes if you’re no longer around.
Mistake # 4 – Cheating on Your Application
It can be tempting to omit certain facts about your health, lifestyle, or family history to get lower premiums, but don’t do it. The insurance companies have access to Medical Information Bureau (MIB) reports.
The MIB is a storehouse of medical information that the life insurance industry can check if there’s a discrepancy in your medical information. When you apply for life insurance, you give the insurance company your medical history from your perspective.
They also collect your physical exam results from your application and medical records from your doctor as well. If the company notices any differences in these two records, they will get in touch with the MIB and look over even more of your records to fact check.
In these records from your health providers, it is very likely the missing information from your life insurance application would turn up. When the insurance company discovers the information, they simply raise your premiums to what they should have been all along. In extreme cases, they may decide to decline the application altogether if it’s revealed that you barely told the truth at all.
If you do get away with lying on your application and it’s approved, know that the insurance company has the right to investigate and deny death benefit claims during the first two years the policy is active. If it is discovered that you lied to get your policy, the insurance company can reduce or even completely deny any payout to your beneficiaries.
The best thing to do when applying for life insurance is to be honest and assume that everything you put on your application will be investigated.
Mistake # 5 – Not Buying Enough Coverage
Like we said before, $100,000 in coverage from a group life insurance policy may seem like a lot of money at first glance, but when you factor in the cost of your mortgage, child-raising costs, and college tuition, it suddenly isn’t very much at all. Buy as much term life insurance as you can comfortably afford.
If you need some help determining the right amount of life insurance coverage, check out our life insurance calculator. . It’s easy to use and will help reassure you that you’re buying the right amount of life insurance.
» Calculate: Life insurance needs calculator
Mistake # 6 – Improperly Designating Beneficiaries
You may think that assigning someone to get the life insurance money after you die is a no-brainer, but choosing beneficiaries can be a little trickier than that. The whole reason to own life insurance is so your income is replaced for the benefit of your beneficiaries. If it’s not set up properly, then it can become a mess.
We’ve written a lot about picking your beneficiaries. Check out our blog 10 Things Not to Do When Choosing Your Life Insurance Policy Beneficiaries for more helpful details.
Mistake # 7 – Not Reviewing and Updating Your Policy
Life insurance is not a set-it-and-forget-it financial product. Ideally, you want to review your policy every couple years and every time a significant event happens in your life, such as a marriage, divorce, birth, job change, home purchase, etc.
Reviewing and updating your policy is crucial to make sure it will still carry out your financial wishes if you’re no longer around.
Mistake # 8 – Not Shopping Around
Life insurance companies all look at applicants a little differently. For example, one company may offer you a term policy for $25 per month, another company may offer that same term length and coverage for only $18 per month because they think you’re less risky.
Quotacy isn’t tied to one insurance company, we’re an independent broker. This means that we can do all that shopping around for you behind the scenes.
When you decide to apply for life insurance at Quotacy, one of our agents will look over your application before we send it out to make sure you’re going to get the best price possible. If we find a less expensive option for you, we let you know and let you decide what you’d like to do.
Long story short, life insurance is a great product, but having an expert in your corner will help you get the coverage you need at an affordable price. Start by getting a free, anonymous (no contact information required) term life insurance quote today to remember the life insurance mistakes to avoid.
» Learn more: Your Life Insurance Beneficiary Review Guide
Photo credit to: GWPorter
Watch the Life Insurance Mistakes to Avoid Video
Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.
I’m Jeanna and I’m Natasha.
Today’s question is: what mistakes do I need to avoid when looking to buy a life insurance policy?
When it comes to choosing a life insurance policy there is the potential to make serious and costly mistakes.
Today, Natasha and I will talk about five things you’ll want to avoid when dealing with life insurance.
The first mistake to avoid is The Triangle.
Ah yes the ominous Triangle. Also called the Goodman Triangle. This triangle occurs when the owner, insured, and beneficiary of a life insurance policy are three different parties.
Generally, a beneficiary of a properly structured life insurance policy will receive the death proceeds both income and gift tax free, but not if the triangle exists.
In the event of the insured’s death, the death benefit is considered a taxable gift from the policy owner to the beneficiary. The easiest way to avoid this tax liability is to have the insured and the owner the same person or the owner and the beneficiary the same person.
The second mistake to avoid is not naming a successor owner.
One of the most common questions we receive from our blog readers involves who takes over ownership of a policy when the owner dies before the insured.
If the owner and insured on a life insurance policy are two different people and the owner dies first the policy ownership has to pass to a successor owner but if you don’t name a successor owner, the policy will be subject to probate.
During this court process a new owner will be determined. Probate can cause a policy to be subject to creditors’ claims and unnecessary costs. It can also cause ownership of the policy to pass to an unintended owner or to be divided among multiple owners.
So, if the insured and owner are two different people on a life insurance policy, name at least one successor owner or have an entity such as a trust own the policy.
The third mistake to avoid is allowing your estate to become the life insurance policy’s beneficiary.
This can happen by default if you don’t name a contingent beneficiary and your primary beneficiary dies before or at the same time as you.
If the insured’s estate is the beneficiary when the insured dies the policy’s death benefit may unnecessarily be subject to probate, creditor claims, and estate or inheritance taxes.
The simplest way to avoid this is to name a contingent beneficiary.
The fourth mistake to avoid is including the death benefit in your estate.
If you’re the owner of your own policy, which is common, the amount of the death proceeds is included in your estate when you die.
For most people this will not be a problem because you need to exceed an exemption limit before you actually need to pay an estate tax. This exemption limit is in the millions.
But if you have many assets creating a large estate being the owner of your own policy may trigger unnecessary estate taxation. The easiest way to avoid this unnecessary tax is to have someone else own your policy.
If you already own your own policy, you can transfer ownership. The taxman has a rule though, of course. If you die within three years of the transfer the policy proceeds will still be included in your estate. This prevents people who are on their deathbed from quickly getting rid of property to avoid taxes.
Today’s fifth and final mistake to avoid is failure to do policy reviews.
Your policy isn’t a set it and forget it product. Life changes bring on the need to review your life insurance policies. For example, if you get married, have a baby, or start a business you may need more coverage or a new policy.
Not all change requires a new policy but these changes are a good excuse to review all of your existing policies, just in case. Try to make it a habit to review your policies every couple of years. As well as whenever your circumstances change.
If you have any questions about life insurance, make sure to leave us a comment. And if you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.
» Compare: Term life insurance quotes
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