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17 life insurance mistakes to avoid

Getting insurance shouldn’t be difficult. Knowing what life insurance mistakes to avoid ensures you have coverage when you need it most. While the fine print may be hard to read, it’s important to pay attention to what it says on your policy and adjust it as needed. What’s written in the fine print can impact you in different ways, from increasing your premiums to even leaving you without benefits in case of an accident. When it comes to life insurance, it’s easy to make a mistake. Here are some common mistakes and how to avoid them

Life Insurance Mistakes to Avoid

  • Mistake #1 – Getting the wrong type of insurance

When you’re thinking of getting insurance, there’s a tendency to focus on just getting life insurance. Death isn’t your only or even biggest risk. What about disability, critical illness, or long-term care insurance? Part of your budget could be better spent on these harmful financial risks, which are more likely to happen.

  • Mistake #2 –  Getting the wrong term

If you buy term 10, your rates will jump dramatically every 10 years. If you’re healthy, you can apply for new insurance, which is often cheaper than renewing. You can’t guarantee your future health, however. A safer option is choosing a term longer than you think you need. Your choices aren’t limited to 10, 20, or 30 years, either. There are products that let you pick the term, such as 12- or 34-year terms.

  • Mistake #3 –  Underinsuring yourself

Life insurance could easily cost less than you expect if you’re young and healthy. For a small additional cost, you could add more coverage and also provide a huge gift to your beneficiaries.

  • Mistake #4 –  Ignoring discounts

Increasing the face amount could cost you less since you get volume discounts as you buy more. You could find that $250,000 costs less than $200,000. Also, $500,000 doesn’t cost twice as much as $250,000 – that’s a life insurance mistake to avoid, better yet, that’s a financial mistake you don’t want to make.

Getting coverage on your partner from the same insurer also often leads to discounts as does buying another form of insurance at the same time (for example, term life insurance plus either critical illness or disability insurance).

  • Mistake #5  – Buying term and not investing the difference

Permanent life insurance with a cash value combines insurance with tax-sheltered investments. It’s easy to think that you’re better off buying term life insurance and investing the difference yourself. Will you really invest the rest? You might find the discipline of forced savings in insurance suits you better. You can then use the equity you’re building to take breaks from paying premiums.

  • Mistake #6 – Limiting your options

When you buy term life insurance, you often have the contractual right to convert to whole life insurance without underwriting up to a specified age like 65. That means the insurance company won’t ask about your health or finances. You may think you’ll never want permanent life insurance but your situation could change. Some insurance companies have more or better permanent plans. Buying term life insurance from a larger insurer gives you more options.

When you buy permanent life insurance, you have several choices. With term 100, you lose the opportunity for tax-sheltered growth because there’s no savings component. For roughly the same price (or sometimes less), you could get universal life insurance with a level cost of insurance. This gives you additional funds to invest.

  • Mistake #7 – Not reviewing coverage regularly

There’s more to life insurance than paying premiums. Your situation changes continually. Maybe you have a different partner but haven’t changed your beneficiary, or you’ve added to your family and want to add life insurance for babies. Reviewing your life insurance once a year lets you see if adjustments are needed. Be forewarned, some life insurance contracts can include an automatic renewal at higher rates. Pay attention to the renewal rates when buying an insurance policy. Insurers rely on statistics and may assume that, with time, your health condition gets worse (e.g. you getting older) and will “adjust” to that risk via higher premiums.

Also, with permanent life insurance with a cash surrender value, you can request projections to see if your coverage is performing as planned.

  • Mistake #8 – Cancelling coverage

Cancelling insurance is easy. Getting it back isn’t. You could make a decision you’ll wish you hadn’t at a later time. Explore your options before you decide.

  • Mistake #9 – Procrastinating

You can only buy life insurance before you need it. Since you can’t predict when you’ll die, delaying buying insurance brings risks. If you can’t afford as much as you’d like, you could get what you can afford and top it up later.

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  • Mistake #10 – Pre-conditions 

If you do not mention existing pre-conditions (e.g. existing heart disease, surgeries in the past), your claim may be denied later when you need the insurance benefits. An insurance company will consider that you lied in order to benefit from lower premiums whereas an insurer had to carry a higher risk.

  • Mistake #11 – Mortgage protection insurance and accidental death life insurance

Another life insurance mistake to avoid is buying any special types of life insurance, such as mortgage protection insurance (which covers outstanding mortgage debt in case of the insured’s death) or accidental death life insurance (offers coverage only if the insured dies in an accident; this case is far less probable than dying because of health-related issues). Mortgage protection insurance is a fascinating product created by lenders. Got a mortgage of $500,000 with mortgage protection insurance? It is actually better to get a large Traditional Life Insurance policy (e.g. Term) which will cover your mortgage payments and all other expenses that you would need to take care of (income for your family, payments for your kids’ college, funeral costs, etc.)

  • Mistake #12 – Benefits lock (or “waiting period”)

Almost all guaranteed issue life insurance policies include a 2-year waiting period. If you die by a non-accidental death in the initial 2 years of the policy, you will get back only your premiums and associated interest but not the benefits associated with your claim. The main reason for doing it to avoid insurance fraud.

  • Mistake #13 – High-risk countries

Your life insurance policy may exclude some countries if they are too dangerous (e.g. regional conflicts, wars, epidemics). Thus if your job requires travelling, you might have no coverage in those geographies. Make sure to read your policy’s footprint carefully.

  • Mistake #14 – Dangerous job

Are you working for a mine squad or Special Forces unit? Your insurer might exclude some dangerous jobs from its policy, or worse they may decline coverage altogether. For example, according to U.S. data for 2012, construction workers faced 17.4 deaths per 100,000 workers whereas loggers had 127.8 deaths per 100,000 workers making that job 7 times more dangerous than the previous one. If you’re a fan of sky-diving or other dangerous sports, know that the chances of dying from mountain climbing are 1 in 1,750 whereas the same ratio for running and jogging or swimming is 1 in 1,000,000. Your insurer knows their risks and will charge accordingly.

  • Mistake #15 – End of the policy

In order to avoid increasing life insurance quotes when renewing your policy, consider a guaranteed renewable or convertible policy, which do not require a new medical exam or can be converted into another type of insurance.

  • Mistake #16 – Driving history

It may not seem like a life insurance mistake to avoid, since it’s really about your auto insurance, but If you have not disclosed your serious driving incidents in the past (e.g. driving under influence), your coverage can be denied since an insurer may consider it insurance fraud in order to get lower car insurance quotes. Dangerous driving in the eyes of an insurance company means more risk and thus will be associated with higher premiums

  • Mistake #17 – Payments

The final life insurance mistake to avoid is when you make your payments. There might be a difference in premiums when choosing monthly payments vs. annual payments. If you can pay on an annual basis, your insurance rate can be lower. In comparison to monthly payments, annual payments save insurers administrative costs (e.g. distributing bills via post) and therefore they reward you with lower premiums.

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