5 Mistakes Life Insurance Mistakes That You Should Avoid

There are numerous compelling reasons to consider purchasing a life insurance policy, including a recent marriage, a new baby, or incurring a large debt (such as a home) that loved ones would struggle to repay if you died. Perhaps you have seen firsthand the financial impact that a death has on surviving family members.

If you're looking for life insurance or have recently purchased a policy, make sure you don't jeopardize your family's finances by making these mistakes.

Getting Life Insurance

A life insurance policy is a financial contract that provides a death benefit to a person's heirs or other beneficiaries in the event of their death. The goal of this death benefit is to replace any current and future income lost as a result of that person's death, to cover any outstanding debts and obligations, and to leave some extra money as an inheritance or legacy.

Today's life insurance market is highly competitive, with numerous companies offering various types of policies and products. Term life insurance is the most fundamental type of coverage, offering a fixed death benefit for a set number of years (e.g., 20 years). If you want to continue your coverage after the term expires, you must reapply. Permanent life insurance can cover you for the rest of your life and often includes a cash accumulation component. These policies have higher premiums than term policies, but they also provide additional benefits and value.

The application process will be the same regardless of which type of insurance you choose. You will be asked to provide basic information, your financial situation, and to complete a health survey. In addition to the survey, you may be required to undergo a paramedical exam, during which a trained healthcare professional will examine you and may request blood and urine samples for analysis. This is due to the fact that life insurance rates are based on the statistical likelihood that you will die and the insurer will have to pay out a claim.

As a result, insurance premiums are frequently lowest for younger people (who are often healthier and have a longer life expectancy) and healthier people. Those with health issues or who lead riskier lifestyles (for example, smokers) can expect to pay more.

You will be required to pay regular policy premiums once approved (which can be set anywhere from monthly to annually). The policy will remain in force as long as you continue to pay your premiums; otherwise, it will lapse and your coverage will be lost.

Mistake #1: Waiting to Buy Insurance

When purchasing life insurance, it is critical to consider both the amount of coverage required and the cost. The cost of life insurance is determined by a variety of factors, including your age and overall health.

Purchasing a life insurance policy sooner rather than later can work in your favor if you want to get the best deal possible. Rates for life insurance typically rise as people age or their health deteriorates. In addition, illnesses or health problems may make you ineligible for coverage in some cases. The longer you wait to buy insurance, the more it will likely cost—if you can buy it at all.

Mistake #2: Buying the Cheapest Policy

While it is important to look for a policy that is reasonably priced, it is also important to consider what you are getting in terms of coverage. Because life insurance policies can be complicated, it's a good idea to educate yourself on their features and benefits.

Term life insurance, for example, is less expensive than permanent life insurance. However, there is a catch: term life insurance only covers you for a set period of time, whereas permanent life insurance covers you until death as long as your premiums are paid.

If you believe you will only require life insurance for a limited time, such as 20 or 30 years, a term life policy may be an affordable option. However, if you want lifetime coverage or a life insurance policy that builds cash value as an investment vehicle, it may be worth it to pay more in premiums for permanent coverage. Compare the prices of various life insurance policies to see what you might be giving up in exchange for a better deal.

Mistake #3: Allowing Premiums to Lapse

When you buy life insurance, you must pay a premium in exchange for coverage. Once again, these premiums can be determined by your insurance risk class, which is determined by your age, health, and other factors. If you're thinking about purchasing a universal life policy with secondary guarantees—low-premium guaranteed death benefits for life or for a set period of time—a late payment can have an impact on the policy's benefits.

Universal life is a type of permanent insurance policy that has been marketed as providing long-term guaranteed protection at the lowest possible rate—it is not the same as term insurance. While many of these policies have a cash surrender value, universal life with secondary guarantees focuses on providing the most insurance for the least amount of money.

Some of these policies are susceptible to premium payment timing. For example, if you miss a monthly payment or send in your check more than a month late, your guaranteed policy may no longer be guaranteed. If one payment is late or missed, a policy purchased with guaranteed coverage to age 100 may only provide protection to age 92, which could be problematic if you live longer.

Mistake #4: Forgetting Insurance Is an Investment

The Financial Industry Regulatory Authority (FINRA) considers variable life insurance policies to be investments, so you should as well.

A variable life insurance policy is a type of permanent policy that provides life insurance with a cash value. A portion of the premium is used to pay for life insurance, while the remainder is invested in various investments similar to mutual funds that you select. The value of these accounts, like mutual funds, fluctuates and is determined by the performance of the underlying investments. People frequently look to these policy values in the future to supplement their retirement income.

A variable life policy must be adequately funded to maximize cash value growth. This includes continuing to make adequate premium payments, particularly during periods of low investment returns. Paying less than you intended can have a significant impact on the cash value available to you in the future. It is also critical to monitor the performance of your policy and rebalance your accounts on a regular basis, just as you would with any investment account. This will help you avoid taking on more risk than you intended when you set up your account.

Mistake #5: Borrowing From Your Policy

Permanent life insurance policies with cash values may be a source of funds if you need to borrow money. If done correctly, the cash value of a permanent policy can generally be used for whatever purpose you see fit, including tax-free withdrawals and loans.

This is a significant benefit, but it must be managed carefully. If you withdraw too much money from your policy and it lapses or runs out of money, all of your gains will be taxable. Not to mention that you may significantly reduce the death benefit available to your beneficiaries if you die.

If you have taken too much money out of your policy and it is about to lapse, you may be able to keep it by paying additional premiums, assuming you can afford them. When accessing the cash value of your life insurance policy, keep a close eye on it and consult your tax advisor to avoid any unexpected tax liability.

Can You Have Multiple Life Insurance Policies?

There is no rule that prohibits you from owning multiple life insurance policies issued by life insurance companies. And there are some cases where doing so makes sense.

For example, you may have purchased a $250,000 term life insurance policy at the age of 30, only to realize at the age of 40 that you require more coverage. To fill any gaps in your financial plan, you could purchase a second $250,000 term life policy. You can also choose to have both a term and permanent life insurance policy.

However, there are some things to consider when purchasing multiple life insurance policies. For starters, having multiple policies means paying multiple premiums. Depending on your age and health, you may notice a wide range between the highest and lowest premiums if you purchase different policies at different times.

Applying for multiple policies may necessitate taking multiple paramedical exams. These exams are performed as part of the underwriting process and typically include the submission of blood and urine samples, as well as the checking of your blood pressure and other vitals. While these exams are usually brief, scheduling several of them at the same time may be inconvenient.

Keeping track of multiple policies can also be difficult, especially if you use several permanent life policies as an investment tool. It may increase your chances of missing a premium due date, causing one of your policies to lapse.