Buying life insurance looks simple: pick an amount, a type (temporary or permanent), and the lowest price. But that’s not the best way—here are some common mistakes and tips on how to overcome them.
1. Expecting speed
You can’t get life insurance at the specific moment you want it. The approval process often takes 1-3 months and your health can’t change during this period. If you’re in a rush, don’t need much coverage and are willing to pay extra, you could get a quick issue product with simplified underwriting.
2. Buying two years too late
Your life insurance has a two-year “contestability period.” This means claims within the first two years face additional scrutiny. Will your beneficiaries get paid? That’s not a question you want them to worry about.
In addition, there’s a two-year suicide clause which can reduce the death benefit to a return of your premiums—hardly a substitute.
Tip: Get through this uncertain phase as soon as possible to avoid problems later.
3. Getting declined
If you apply for insurance coverage and are declined, you’ll be flagged in the shared Medical Information Bureau (MIB) database. That makes getting insurance more difficult in the future. If you think you could be charged extra or declined, have your advisor contact insurance companies anonymously to find out the conditions and price under which they’d insure you. Save your insurability.
Tip: If you find out that you won’t get insured, don’t apply.
4. Applying when you’re expecting a baby
Getting more life insurance when you’re expecting a baby makes lots of sense. If you’re the mother-to-be, you’re going through many changes which could affect your health. Also, you may find you have medical conditions you didn’t know about before. As you might expect, life insurance becomes more expensive and difficult to get.
Tip: Apply for life insurance earlier in anticipation of having a family later.
You can apply for life insurance tomorrow or next month or next year … until you can’t. You don’t know when you will really need life insurance. At that time, you might not qualify or get coverage quickly enough.
Tip: Get insurance the only time you can—before you need it.
6. Applying after you lose your job
You need life insurance more when you no longer have a job. Getting approval is more difficult when you don’t have a steady income because insurance companies want to make sure you’ll pay your premiums.
Tip: You may be able to convert your group life insurance from your previous employer to personal insurance without proof of health if you act quickly. While this may cost more than buying new coverage, you get convenience.
7. Canceling your life insurance
Canceling insurance is easy. Getting insurance back again is difficult. You’re forced to go through the underwriting process once more. Since you’re older, your premiums will be higher.
Tip: Look for ways to keep your insurance going during tough times.
8. Buying based on price
If you don’t understand the pros and cons of term insurance vs. permanent insurance or one insurance company vs. others, you may be tempted to buy on price. There are material differences. Taking time to understand them will help you make a better decision today for tomorrow.
9. Looking at insurance as an expense
Life insurance is an investment that increases in value every year because the payout gets closer. If you buy term insurance, you’re gambling because there’s a high probability that you’ll cancel your coverage before a claim. With permanent insurance, you have a sure bet. A claim will eventually be paid provided you keep your coverage in place.
Tip: Consider paying your premiums by reallocating assets rather than from income.
10. Ignoring regular maintenance
Your need for life insurance changes as your situation changes. You may need less or more in the future. You may want to change your beneficiaries if you have a different spouse or dependents.
Tip: Review your insurance once a year, perhaps at tax time.
11. Overlooking your estate
When you have a mortgage and a young family, your need for life insurance is clear. As you pay off your debts and your children become independent, your savings can grow: more retirement savings, more investments, perhaps including real estate, and a bigger tax liability at death. Life insurance is often the most cost effective way to pay final expenses and taxes. Your heirs and preferred charities then get more.
Learn from the mistakes of others and you’ll do well.
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