Biggest Life Insurance Mistakes

Wayne Quint |

For most people, buying life insurance is difficult enough, even when it’s done right. But when it is done with only one eye open, or haphazardly just to ‘get it over with’, mistakes are very common, and they can be very expensive. Without question life insurance is one of the most important purchases people make in their lifetimes, yet many people are ill-equipped to make informed decisions. Consequently, many life insurance owners express doubt, or even remorse, over their purchase. By avoiding some of the biggest mistakes that people make when buying life insurance, you can be more assured of your purchase and enjoy its peace of mind.

Mistake #1 – Failing to Recognize the Real Reasons for Life Insurance

You know you need life insurance, but do you understand your real reasons for owning it? Yes, it can pay off your family’s debt, perhaps provide a post-secondary education for your children, and it will be a much needed source of income for your spouse when your income stops. Those are the practical needs for life insurance, which, as discussed in the next section, are vitally important to the buying process.; But, unless the purpose of life insurance is understood at an emotional level, it will remain in your mind as a “should-have” as opposed to a “must-have” which makes it seem somewhat expendable.

From your family’s perspective, the purchase of life insurance is one of the most unselfish acts of love and devotion that you can leave behind. As the provider for a family, life insurance is the one thing that you can buy that will give you a sense of security and the absolute peace of mind knowing that your family will not want for the things that they need to live the life you envision for them, after you pass away.

Mistake #2 – Not Buying the Right Amount

One of the worst feelings is wondering if you own enough life insurance, or perhaps worse, wondering if you own too much.; In either case, you wind up second guessing your purchase because you don’t know if it will be enough, or you are concerned that you’re paying more than necessary to protect your family.

Determining your need for life insurance is not an art – it is a mathematical science based on known facts and realistic projections that arrive at a solid solution. You must be clear about the facts: does your family have a specific amount of debt that needs to be repaid? Do you have certain obligations such as ensuring your children will have educational opportunities? What are the specific income requirements of your family to be able to maintain their lifestyle? Do you currently have a specific amount of assets that are readily available? And does your family may have other sources of income that will be available to them after your death? You need to be very honest about the answers to these questions.

Next, you need to hypothesize about the future so that you can apply some assumptions such as the increase in the cost of living over time, and the growth rate on capital including the proceeds from life insurance. This will enable you to calculate how long your assets and life insurance proceeds will last.;

You can make some assumptions as well about how long the need for life insurance will last. For instance, once your children have graduated from college they should be less dependent on your family’s income. If you have children with special needs, however, their dependency may last a while longer. You can also assume that your spouse can eventually replace your lost income with his or her own earnings; however, it is important to account for a spouse who may not have the earning capacity to do so.

Using this practical planning approach, the amount of life insurance you will want to own will be based on a real life look into the future with actual facts, your current situation, and realistic assumptions (inflation, growth rate, and needs assumptions). Your insurance advisor will be able to aid you with your calculations.

Mistake #3 – Buying the Wrong Kind of Policy

With life insurance you have many choices that can work in your favor if you recognize the importance of matching the type of policy to your specific needs and wants. The mistake many people make is to follow the advice of someone who knows little or nothing about their situation. You might read an article about why everyone should just buy term life insurance because it is the cheapest; or you might get an earful from a colleague who is raving about his variable life insurance plan. Your life insurance solution should stand on its own based on your needs, preferences, and priorities. A professional life insurance advisor will be able to guide you, and more accurately assess you specific needs.

Term life is an excellent choice for people are prescient enough to know when their need for life insurance will cease to exist. For people who are on a financial track that will ensure that they will accumulate enough of their own assets, the need for life insurance may diminish over time. A tragic mistake that some people make is buying term because it can save some money currently only to find that their need for protection continues after the policy expires. They could find themselves in a situation where they need to repurchase some life insurance, but they can’t get it because they aren’t insurable (perhaps because of age or health concerns), or because it too expensive.

Permanent life insurance is also not necessarily for everyone either, as it is typically a more expensive solution in the beginning. But, for people who recognize that their need for protection is likely to continue beyond 15, 20 or even 30 years, it can be a much more cost effective way to own life insurance for the long-term. The cash value growth in some permanent policies is not only way to accumulate savings, but also it can be applied to pay for the premiums at some point, so the policy can become self-perpetuating. With permanent life insurance, the same life insurance you bought to protect your young family will remain available to protect a family business, supplement your spouse’s income, protect your surviving spouse’s retirement income against investment losses, or cover the cost of your funeral expenses.

There are many different types of permanent life insurance plans, such as whole life, variable life, universal life, variable-universal life. Each has features and characteristics that can benefit people in different situations. It is well worth your while to thoroughly review each of the different policy types with the guidance of an independent life insurance professional to determine which would best suit your needs and the needs of your family.