Mistakes to Avoid Before Buying Life Insurance
- Not owning any life insurance At the beginning of my list is not owning any life insurance at all. Most of us have some group term life insurance through work. You don't control that life insurance though. You should probably also have at least some life insurance that you own personally outside of work. See having enough insurance for a funeral below.
- Relying on the group life insurance you get at work Most of the life insurance you get through your employer will end at some point. It will end either when you leave employment or at a certain age. The problem is that most of us live a lot longer than that. I'm still a fan of group life insurance but I go over a list of the problems with group term life insurance here.
- Thinking the life insurance policy your parents bought for you when you were a kid is all the life insurance you'll ever need I often talk with people in their 40's and 50's who say they have life insurance and don't need any. When I dig a little deeper, I often hear that the life insurance they do have is what their parents got for them when they were kids. They've never updated or even looked at additional life insurance in decades. While I do run across people whose parents have picked up a significant amount of life insurance for them when they were younger, it's still a good idea to consider increasing your amount. Over time inflation makes it important to add to it.
- Not having life insurance in an amount at least enough for a funeral Unfortunately, everybody is going to die at some point. When you die, you have to pay for some sort of funeral. The responsible thing to do is to at least have enough life insurance to pay for your funeral so others don't have to. You might be fine having your body buried out back in a pine box, but I'm not sure if that's even legal. So in the end, your family plans a funeral. I have heard many stories of family members having to pitch in and pay for funerals out of their own pockets. It's a financial shock for family members to have to pitch in to pay for your funeral. Some people end up setting up payments with the funeral home and if they don't pay may even get taken to court.
- Not having life insurance on your children or other family members for an amount at least enough for funeral Many people don't buy life insurance for their children. While there is a low probability that something will happen to your kids, it's better to be safe than sorry. If the worst happens, there still needs to be a funeral. The people I have talked with that have gone through it, can't stress enough how important is. The same is true for spouses or other family members.
- Not having enough life insurance If you have a young family, a $125,000 mortgage, two car payments and only have $20,000 in life insurance, you probably are underinsured. You should consider picking up more life insurance. Also read my post on how much life insurance do you need?
- Waiting too long to buy life insurance The longer you wait to buy life insurance, the higher the premiums will be due to your age or health problems. Also, since you have to qualify for life insurance, if you lose your ability to qualify due to health problems, you may not be able to get any. I talked with someone the other day who's parent died without any life insurance because they waited until they were extremely ill to buy it and just couldn't get it.
- Not believing in life insurance One phrase I hear from time to time is that people don't believe in life insurance. With the number of GoFundMe fundraisers for funeral expenses that I see, it's a shame that at least enough life insurance to pay for a funeral isn't purchased by everyone. I'm sure that if you are on the paying end of someone who didn't believe in life insurance, you become a believer really quick. I can't count the number of people who've told me they had to pay for a funeral because the person who died didn't believe in life insurance. Needless to say they weren't to happy about it.
Let's move on to mistakes I see that people make when they buy life insurance.
Mistakes to Avoid When Buying Life Insurance
- Buying life insurance without an agent Let's face it. Life insurance agents have gotten a bad reputation because some of them have used some questionable sales tactics. A lot of people are afraid to meet with an agent and use their services. First, it's important to note that whether you use an agent or not, your premium is likely to be the same. The other thing that is important to note is that if you fill out the life insurance application on your own without an agent, I've heard of insurance companies denying claims because the application wasn't accurate at the time of application. Since it doesn't really save you any money to go direct, then as a safeguard, I'd still recommend working with an agent. That way, you'll have a person you can ask to help you if you need it.
- Not taking advantage of guaranteed issue when you should Occasionally, I see offers people in the workplace turn down offers for guaranteed issue life insurance. Guaranteed issue means you don't have to answer medical questions. I've seen people who couldn't get life insurance any other way turn down a great offer they'll never get again.
- Lying on the life insurance application (or application for re-instatement) I'm often asked by people what if they lie about an answer to a question on a life insurance application. If I had to guess, I'd say the most common thing that people consider lying about is tobacco use. There are a lot of smokers out there who don't really consider themselves smokers even though they smoke all the time. As an agent though, I have to remind people to always be honest on your life insurance application. Otherwise, the insurance company may deny a claim if they find out and you don't want that to happen.
- Not preparing properly for the life insurance exam For policies that require you to take a medical exam, you want to make sure that you make sure to follow some common sense rules. You don't want to hurt yourself by doing poorly on an exam you could have done better on. I once had a applicant go partying and drinking binge the holiday weekend right before he took his exam. Of course, his blood work was all out of whack and his exam results increased his premium. Just keep in mind, try and keep your diet clean and body rested before you take an life insurance exam. This isn't the time to experiment with smoking pot for the first time for example (or anytime for that matter!)
- Buying the wrong type of life insurance One of the more popular pages on my website is one that discusses accidental death. It's visited by people who want to know if they will get paid from an accidental death policy. Sometimes people buy accidental death only policies by mistake not knowing that they won't pay if you die of an illness. Then there is the old debate between term and whole life.
- Not setting up the life insurance options correctly A life insurance application is a multi-page document with lots of detailed information to fill out. It's easy to overlook some common options you want selected.
- Free additional riders Be sure that any riders that don't cost you anything are added to the policy. It's easy for an agent to overlook adding an option you might want added. If there is no charge for it, then there is no reason not to add whatever is available. Sometimes, it's overlooked.
- Contingent owner You might want to name a contingent owner in some cases. A good example would be when you have a life insurance policy on a minor. If something happens to you, you might want to name a specific adult to be the owner. This will make sure that the person you want managing it will.
- Automatic premium rider If you have a permanent life insurance policy, you'll want to select yes for the automatic premium loan option. This will provide a safeguard if you can't pay your premium for a reason like being sick and unable to take care of your bills.
- Dividend options If you have a whole life policy, make sure you choose the right dividend option. There are five dividend options you can choose from.
- Not considering conversion options when buying term insurance When you buy a term policy, it's a good idea to have a conversion option available. A conversion option allows you to change a term policy to a permanent policy. You want to make sure that the options you have to convert to are just as quality as the term policy you started with.
- Owning your life insurance in your own name Owning your own life insurance in your own name can cause a couple of problems.
- Potential estate tax While life insurance death benefits are income tax free, they are not estate tax free. Anything you own, including life insurance is considered part of your estate for estate tax purposes. With the recent tax changes, I'm not sure this is still an issue but it could be.
- Impact on medicaid qualification If you are looking to qualify for medicaid, then any life insurance you own may have to be surrendered.
- Making mistakes with your beneficiaries There are three mistakes people make when naming beneficiaries. Those are:
- Naming your estate You always, always, always want to name a direct beneficiary. Payments made to a direct beneficiary pass outside your estate outside the hands of creditors. If it goes into your estate, your beneficiaries have to wait until your estate is settled before they get the money which could be months or even years down the road. Life insurance claims are paid as soon as the insurance company processes your claim.
- Naming a minor You want to try and avoid naming a minor as a beneficiary. Minors have to have someone appointed to manage their affairs. This is even more important if you have children from a previous marriage. Since it's pretty common for people with younger children to also not have made a will, it's a possibility an ex could be in control of money for your children when you didn't want them to be.
- Not naming a beneficiary If you don't name a beneficiary, it will go to your estate.
- Not naming a contingent beneficiary You always want to list a back up beneficiary in case your beneficiary dies at the same time as you or before you to keep your death benefit from going into your estate.
- Not telling your beneficiary you have named them as beneficiary From time to time, people don't know who is listed as the beneficiary to a policy when someone dies. This leads to confusion and sometimes anger over what in the world you were thinking when you named someone else beneficiary.
Now, let's move on to the next set of mistakes.
Mistakes to Avoid After You Buy Life Insurance
- Not making sure your life insurance policy was delivered If you buy an individual policy, you should receive a policy. This policy will either be delivered by the agent or by mail. You want to make sure that you receive a policy so you can review it. We bought an individual policy on my son from where my wife works five months ago and I still haven't received the policy. After getting no response from the agent who wrote the policy, I finally contacted the insurance company directly. While I was able to verify the coverage was inforce, the insurance company still has not sent us a policy so I can review it. You have to stay on top of it like I am to make sure you get a policy. Remember though, that you will not get a policy for group term life insurance. That's because you don't own anything there. This is for individual policies only.
- Not reading the life insurance contract One of the reasons you want to make sure you get a policy when you should is so that you can read it. In the story I shared with you in the mistake above, the policy we bought on my son was supposed to be guaranteed issue and that's why we bought it. But I want to read the application attached to the policy to see if there were any medical questions. I also want to see if the policy was indeed a true whole life policy and not a universal life policy. These are things I won't know for sure until I actually read the policy. This is important because it doesn't matter what your agent tells you, it only matters what the contract says. You want to read it. At the very least, you want to make sure you verify your personal details are correct and that you got what you actually applied for both in plan and in amount. You also want to make sure your premium is correct and your beneficiaries are listed how you listed them. You'd be surprised how many times this stuff can be incorrect. If you don't pay attention, it might be too late to correct it. If you need help reading your contract, you should ask your agent or call the insurance company if you need to.
- Not considering paying your premium annually If you have the funds to pay your premiums annually, you should consider it. This saves you money on the premiums, maybe close to a month's worth each year.
- Not keeping the illustration you were given at the time of sale A key tool used to understand how a life insurance policy is supposed to work is called an illustration. You should keep this illustration (along with any other sales material you received). You want to keep the illustration so that you can compare the values you are supposed to have each year to what your annual statement actually shows they are.
- Not keeping your policy documents properly organized and in a safe place Make sure you keep all of your life insurance documents organized and in a safe place.
- Not requesting the removal of a tobacco surcharge if you quit using tobacco Sometimes people forget about asking the insurance company to remove a tobacco rating if they used to smoke or used other tobacco products. Every company is different, but in most cases if you have stopped for more than 1 to 2 years, you might be eligible to have that removed.
- Not exercising guaranteed conversion options If you buy a policy with a guaranteed insurability rider, don't forget to check out what you can do when your options become available. Especially if you have health issues.
- Not knowing what life insurance you have The most common answer people give when you ask them about their life insurance is that they know they have something, but don't know what it is. Most people also buy their life insurance and then never review it. Don't let that be you.
- Not keeping your life insurance policies You should keep all the policies you own in a safe place. A lot of people toss them aside and never know where they are if they need them. While the policy isn't completely necessary if you have to ever file a claim, it certainly helps to have it on hand as proof if you ever needed it.
- Not destroying lapsed policies Imagine keeping policies that had lapsed or been cancelled in your important papers and then your family finding them after you died. Then only to discover that they aren't inforce. Beneficiaries are left questioning the insurance company why they have policy if it isn't inforce. It puts everyone in an awkward spot.
- Not reviewing your life insurance annual statement each year Most people get their annual statement from the insurance company, glance at it and just set it aside. But what you want to do, especially if you have a universal life policy, is compare the statement to the values you expected and saw on the illustration you received at time of sale. The best time to make up in short fall in value is right when it happens. So if you see less in your policy than what was supposed to be there, you might want to add more money right away. Not doing so puts your policy at risk later. The amount needed might be much higher later and you could lose your policy.
- Failing to make required premiums I've ran across many people who have permanent life insurance policies who stopped making premiums. The policy stays in force because the premiums are being paid out of the cash value. This just eats away the value of your life insurance policy. If it's a universal life policy, it severely compromises it. It's a little easier to fix the damage with a traditional whole life policy.
- Failing to change beneficiaries You'd probably be upset if your spouse forgot to change their beneficiary from an ex-spouse to you. But believe it or not, it happens. Don't forget to review your beneficiary arrangements if you get divorced or if you got married. Sometimes people forget to change the beneficiary from the parents or other family members to another spouse.
- Not filing a claim Believe it or not, sometimes people die and a claim is never filed. It's not just the insurance company or agent that may not always be aware of the death of a policyholder. Beneficiaries sometimes don't know either. In fact, I got a call recently from someone who's called me two years after his wife had died. He had recently remembered it or found some paperwork that jogged his memory to check. We filed the claim and got it paid.
- Underfunding universal life insurance policies Many people have universal life insurance policies and are paying a premium that is not sufficient to keep the policy inforce for your whole life. If this is you, unless you dig in to look at your policy now, you won't know until you are much older and get a premium notice from the insurance company. The best place to look and see if you are underfunding your policy is the annual statement. There will be a paragraph that will tell you how long the insurance will last under the current assumptions.
- Borrowing against the cash value You want to do everything you can to never borrow against your life insurance policy. I especially think this is true if it's a universal life insurance policy. I feel better about borrowing cash value from a traditional dividend paying whole life insurance policy. But if you do that, make sure that you pay the interest each year. Also, consider paying it back. If it were me, I'd never borrow against a universal life policy. If you plan on using loans in your life insurance strategy, I'd only borrow against whole life policies.
- Forgetting about riders purchased After many years have gone by, it's easy to forget what life insurance riders you have added to your life insurance policy. I've run across policies with disability income riders or child riders that people had totally forgotten about.
- Not converting child riders If you have a child with a pre-existing condition, you want to look at any conversion option available with any child rider. It might be the only opportunity to get a life insurance policy for your child.
- Not removing child riders that have expired Once your kids have a reached a certain age, a child rider may no longer provide any coverage. However, you'll still pay the premium because the insurance company doesn't know your kids are no longer eligible. I've seen people paying for child riders when they didn't need to anymore and helped them get that rider removed.
- Not keeping your address current You need to contact the life insurance company when you change your address. Otherwise, you won't receive your annual statements - or more importantly - your premium notices. You don't want to take a chance on your life insurance lapsing just because you didn't get a notice in the mail the premium was due.
- Replacing a life insurance policy You want to think twice about replacing an existing life insurance policy with a new life insurance policy. It's not always in your best interest to get rid of an old policy you have had for years.
- Overfunding a universal life insurance policy There are limits to how much "extra" money you can put into a life insurance policy. If you put too much money into the policy, it could create what is called a modified endowment contract that has tax consequences.
- Transferring ownership of a permanent life insurance policy that has cash value If you transfer the ownership of a permanent life insurance policy that has a cash value to someone else, that could affect the tax treatment of the life insurance. If you are considering such a transfer, ask your tax advisor about transfer-for-value rules.
Even I still think I left a couple of things out. If you think I missed any mistakes or want to add anything to the discussion, then be sure and put your thoughts in the comments below.
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