I recently saw an ad promoting “5 Life Insurance Mistakes to Avoid”. Curious as to whether we’d agree, I clicked to read the article. It was from a well-known organization and it quickly enumerated what they consider potential pitfalls of life insurance. Here are my takes on their recommendations as an insurance professional.
Mistake 1: Not buying enough coverage to replace your income
This is one I definitely agree with. Many of the people I speak with have made this particular mistake. It’s not one made on purpose, just lack of education on how insurance works and how it can best serve a person and their loved ones. When thinking about life insurance, most people only consider their burial expenses or think they’ve got time to save up the money. While I’m a huge advocate for having a bank account with 3 to 6 months of expenses saved, reality is we never know when our time is up and life is regularly more expensive than what the average person thinks. Plus, if your family can be taken care of without touching that emergency savings, and get that money tax-free, who wouldn’t want that? Having a policy that is worth 10 to 12 times your income allows your family to replace your income for a year or two while they grieve and find their new normal.
Mistake 2: Waiting too long to get coverage
This is also true. Many people don’t think to insure their children or themselves until they’re older. Part of this is just being human – we feel we’re invincible when we’re younger and none of us like to contemplate our mortality. However, reality is that children become ill and die, people die “before their time” maybe due to an accident or illness, or (more commonly) people develop medical issues of some kind. The average person considers life insurance when someone close to them passes away, when a major medical event occurs, or when they have children and realize that they now have others depending on them. The younger and healthier a person is, the less expensive life insurance is, the easier it is to find coverage options, and the less likely they’re considering insurance. Right after a heart attack or a medical diagnosis is not the time to be looking for affordable life insurance. The future is unknown and not guaranteed; life insurance isn’t available for someone in a coffin.
Mistake 3: Buying too short of a term
I would say purchasing ONLY term would be a mistake. Term life insurance is a policy that terminates after a specified period of anywhere from 10 to 30 years. Generally, it’s less expensive than a permanent policy but, at the end of the term, the insured is that many years older, potentially with medical issues, which can make it prohibitively expensive or impossible to purchase coverage. Also, many of the term policies don’t have living benefits, limiting them to a lump sum payout in the event of death but not supporting the individual should they experience a major medical event or disability that precludes them from working. While term insurance is an important part of securing one’s future, it’s not the only piece needed. Most people benefit from having a permanent policy with the term policy providing extra support while there are children at home or other extenuating circumstances.
Mistake 4: Buying too many riders
The article stated that the cost of riders outweighs the benefits. This one I definitely disagree on. This does not mean I think everyone needs to add every rider to every policy. However, most of the permanent policies offered through the various carriers have at least two or three riders automatically included. The most common included riders are critical illness, chronic illness, and terminal illness. Many also include critical injury. Generally, adding a waiver of premium rider or accidental death rider is very affordable.
These riders provide living benefits and are, I believe, one of the best values on a permanent policy. Basically, riders provide payment for the insured should they experience one of a number of health issues such as heart attack, stroke, cancer, coma, paralysis, ALS or become terminally ill, meaning that they will pass away within 12 to 24 months. Generally, these living benefits allow the insured to access up to 80% of their death benefit while still living. This can eliminate the pressure and stress of needing to provide an income or find a way to pay medical bills while working to get well. The money is tax free to the insured and can be used for anything, with few exceptions or limitations. The waiver of premium rider allows the insured to keep their policy without making payments if they’re temporarily disabled for some reason. And the accidental death rider usually doubles the amount paid out if the person passes due to some type of accident. Since accidents are the number one cause of death for Americans under the age of 44, doubling the money a loved one receives for a nominal amount may be worth it to some.
Mistake 5: Forgetting to review your life insurance policy
This is definitely something that many people forget about and can be devastating. Marriage, divorce, children born, increase in income, home purchase – these are all factors that can impact if one has enough life insurance or not. Some people will need to add coverage based on the changes, others will be able to reduce coverage. Checking on what policies are in place, what they cover, and who benefits should the insured pass away are all details that should be reviewed on a regular basis. Also, insurance companies add to their benefits packages regularly. Checking policies annually allows the insured to take advantage of the new benefits. Annual review is recommended, but definitely any time there is a major life change.
Conclusion
Overall, most of these are mistakes people regularly make. There is one that I think should be added to this list: not speaking with a licensed independent life insurance agent. Starting with that one should eliminate the other mistakes listed above. It’s tempting to try to figure it out by yourself and there’s so much information available. However, there’s no substitute for having someone available to answer questions, ensure that everything is explained clearly, and navigate through the process and options. The security of knowing that your agent is only a phone call or email away can provide an extra layer to your peace of mind.
As a licensed professional, I have a fiduciary duty to my client to advise them on the best coverage for their situation. As an independent agent, I’m able to check with multiple carriers to find the best fit for my clients and their loved ones. As an insurance educator, I always want to make sure questions are answered and policies are fully understood. My recommendations to anyone I meet with are 1) educate yourself, 2) make an informed decision, and 3) find someone you can work with.
Check out my other blogs to learn more about the topics above or schedule a free consultation to deep dive into your situation, questions, and goals.