8 Common Life Insurance Mistakes


Don’t we just hate thinking about life insurance. It means considering our own demise. So instead, ostrich like, many of us just say, “That’ll never happen to me.”

Sadly, aside from leaving our family totally unprepared for our demise, and unprotected financially, there’s another consequence to hating the very idea of life insurance. It means we’re just as likely to do it badly as to do it well. Here are eight common mistakes we make either when we’re buying our insurance, or in keeping it working well for us.

1. We let the premiums make the decision for us. If you start from the premise that you can only afford to pay $x, and let that decide how much insurance you buy, then you’re going about it all wrong. You must first figure out how much insurance you need and then choose the type of insurance that will give you the level of coverage you’re looking for.

2. We think of insurance as an investment. Well, it’s not. It’s risk mitigation. It’s just in case. It’s a necessary part of a sound financial plan. While certain types of insurance do build up money over time — products like whole or universal life insurance — that’s not the first reason for buying insurance. Insurance is about taking care of the “what ifs”. So the amount it will pay out to help your family cope should be your primary consideration, not the potential return on investment.

3. We buy term because it’s the only game in town. The “term vs. permanent insurance” debate rages on. Term insurance, for which you pay only for the death benefit, may be the best fit for many people. However, other types of policies, such as universal life or second-to-die policies, may be a better choice in certain situations. Choose the insurance that’s right for you. Don’t pick something just because you’ve heard it’s what everyone should buy.

4. We confuse illustrations with reality. Life insurance illustrations are designed to show much a cash-value a policy will build over time. And a lot of insurance representatives got their wrists slapped because many of those illustrations implied consumers could count on their policies to be self-funding within a specific — often too short — period of time. But if you haven’t yet heard the news, illustrations are only projections of what may happen. They are not guarantees. The company’s rates of return may decline and earnings may not be sufficient to cover the premiums in the future. So don’t count your chickens.

5. We don’t check back to make sure we’re still well insured. At least every year or two, re-examine your policies to be sure they are still doing the job. If you got married, divorced, had a baby, or had a big jump in income, the amount of coverage may no longer be adequate. Or you might need to add a second, different type of policy, to meet new needs. You don’t have to buy from the same insurance company. Shop around.

6. We forget to change beneficiaries. Oyyy! I hear this one all the time. People, if you get a divorce, remarry, have a new baby, or if your partner dies, you need to review your insurance to make sure you’re not leaving a stash of cash to nobody — or worse, someone you hate! Imagine seeing the death benefits from a policy on your recently deceased spouse go to that person’s former spouse instead of you. Heads up. This is a far more common mistake than it should be when you consider the consequences.

7. We needlessly replace a policy. Sometimes it is appropriate to drop one type of life insurance policy and replace it with another, especially if your life circumstances have changed. But be careful about dropping a policy just to get a “better-performing” policy or for a cheaper premium. The flip side of this is people who automatically renew their term coverage, even when the reason for having insurance has grown up and left home.

8. We name our estate as beneficiary of our insurance. Insurance benefits are free of income tax to beneficiaries, but they face probate if the benefits become part of the insured’s estate. So make sure you’ve named a person (or people) as beneficiary — and not your estate — on your policies.





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