Most people don’t get a formal education in how to buy life insurance or even think about it much, so it’s easy to make some errors when finally getting a policy.
These mistakes might not be totally devastating, but they can cost you a lot of money and hassle, and in extreme cases, they’ll result in your policy being canceled.
Here are 10 common missteps even the smartest shoppers can easily make, and how to avoid them.
1. Waiting too long to buy
Most people, understandably, don’t make shopping for life insurance their first priority after they graduate college or land an entry-level job. Why start now to plan for a future that’s (hopefully) decades away?
The most compelling reason to buy life insurance in your 20s or early 30s is that the younger you are, the cheaper your premiums will be. This rule is pretty much universal among insurance carriers. And it applies universally to insurance buyers, too, since regardless of your health or unique circumstances you’re going to age out of the best prices.
If you lock in a low premium rate as a 25-year-old—these rates can go as low as $20-$30 a month for young, healthy candidates buying term life insurance—you can keep that rate for years, even as you get older.
Less likely, but still significant, is the possibility you’ll develop a health condition later in life that will raise your rates or make it tougher to qualify for coverage. This is partly a side effect of aging since chronic health problems often wait to present themselves until you’re over 30 or even 40. And your risk depends somewhat on your family health history, which you can’t change. But if you’re relatively healthy at the moment, don’t wait on buying life insurance – now is the time.
2. Assuming you’re uninsurable
Of course, just because you’re young doesn’t mean you’re in perfect health. Illnesses and chronic conditions, as well as some lifestyle habits—mainly smoking, but also a record of unsafe driving—can disqualify many life insurance applicants.
Even if you’ve been rejected by a carrier or two, don’t count yourself out completely. There are lots of carriers on the market, and almost every applicant can find some sort of coverage. You won’t get rock-bottom rates, and the process may come with additional complications (you might have to speak to an agent instead of going through an electronic application). But coverage may be more affordable than you expect.
Smokers will pay a large markup if they’re currently using any form of tobacco—companies that insure smokers usually have higher, tiered rates just for them—but you can still find coverage. And if you stop using tobacco for at least a year, insurers will reward you with lower rates.
Similarly, diabetics and others with chronic illnesses are more likely to find decently priced coverage if they can prove they’re managing their condition well and working with medical professionals. People with higher Body Mass Indexes (BMIs) pay more on average, but they still have lots of options for coverage. Or you may find a carrier like Bestow that lets you qualify for term policies without taking the standard medical exam. Each insurer assesses risk a little differently, so if one provider won’t accept you, the next one might.
3. Not disclosing important information
Life insurance applications can be jarring at first since you’re giving a stranger (or an algorithm) lots of personal medical stats from the get-go. It may be tempting to alter or leave out some relevant data for a better potential rate, but it’s not worth it.
Insurers verify everything they can—your prescription drug history, driving record, and any records from your health care providers. Medical info gets checked against the Medical Information Bureau database. If the process reveals a lie on your application (like failure to disclose a major medical condition), the insurer will report the reason for their rejection to the Medical Information Bureau, where other insurance carriers can see it and potentially decline coverage as a result.
Even if you take the secret to your grave, insurers can refuse to pay out the claim if your death is related to a condition you didn’t disclose.
This doesn’t apply to honest mistakes, like “guesstimating” your weight or the date of a medical procedure, but deceptions big enough they have to be intentional.
4. Relying on an employer-provided group policy
When employers offer group life insurance as part of their benefits package, their policies usually have small amounts of coverage (think one to two times your annual salary).
If this amount is enough for your needs—which it might be, if you don’t have dependents or beneficiaries in mind—employer-provided policies are usually not portable, meaning you can’t keep the policy if you don’t work for the employer anymore. While folks in our parents’ and grandparents’ generations often stuck with the same employer for life, Millennial workers, for all kinds of reasons, are more likely to change jobs. It’s smart to have supplemental insurance you can take with you wherever you go.
5. Buying the wrong type of policy for your needs
Everyone’s circumstances are unique, and life insurance isn’t “one size fits all.” First and foremost, be sure you understand the policy—what it covers, what it doesn’t cover, how much you’re required to contribute, and what the cancellation policies are—before you buy it. If you’re working with an agent, ask them any questions you have (even if you think they’re obvious).
Remember your needs may change over the years, so you can always go back and reassess whether your life insurance policy is still working for you. Some insurance buyers get to the end of a term life policy, for instance, and realize they still need coverage—they’ll pay higher age-based premiums to extend the term, or opt for a permanent policy.
Here’s a refresher on the main types of life insurance available to young people.
Term life insurance
Term life insurance is temporary coverage for a specific “term,” usually between 10 and 30 years. If you pass away during this term, your beneficiaries get a tax-free death benefit. Coverage ends after the term is over.
Since this is by far the most affordable type of life insurance, most young shoppers pick term policies. Term is a good choice if you need the financial safety net for a certain time period—for instance, while your kids are getting an education or you have a new mortgage—but may not need it later in life when you’ll have more savings and fewer expenses.
Life insurers that offer term policies will often give you instant quotes for their prices, and sometimes you can go through the whole process online without ever speaking to an agent (which isn’t the case with most permanent policies).
Many term policies are “convertible,” meaning you can switch to permanent coverage with the same carrier at the end of the term if you choose, often without having to take another medical exam. This is a good option if you want to leave the door open for future permanent coverage
Permanent life insurance
Permanent life policies are much more expensive—often hundreds of dollars a month in premiums—because they’re long-term investments, designed to last your entire life and build tax-deferred cash value. Young people who opt for permanent policies may do so because they know they’ll need consistent coverage (for example, if they have chronic medical conditions).
A life insurance policy shouldn’t be your main investment vehicle, but a good one can help build towards your savings goals.
There are a few different types of permanent life insurance, each with its own pros and cons.
- Whole life insurance offers steady premiums that won’t increase over time, and a fixed rate of return on cash value.
- Universal life policies let you adjust your premiums and death benefit amounts at any time, and borrow against accumulated cash value if needed.
- Variable life policies are heavy on the investment side; your premiums are split between death benefits and investments of your choice.
Permanent life policies are usually bought through an agent, so make sure you choose a broker who will work in your best interest, not a salesperson.
6. Taking the first price you’re offered
Each insurance provider’s underwriting process is different, which means they won’t all offer you the same price for the same amount and length of coverage. You could get radically different prices from different carriers.
It really does pay to compare at least three different providers as you shop around for coverage online, and not only because of cost. The cheapest price isn’t worth it if the provider can’t answer your questions, has poor customer service, or lacks the resources to pay out your claim. To check if the company is financially healthy and reputable, check out their score from the insurance credit rating agency A.M. Best.
The easiest place to get started is with a website that functions as an independent broker, like Policygenius. Brokers collect quotes from multiple different insurance companies at once so you can compare prices and other factors side by side.
Sproutt is another independent broker with its own niche – their partner companies reward people for healthy lifestyle choices with lower rates.
7. Not buying enough coverage
Before you get a quote, insurers will have you choose a coverage amount, so you should go in with a ballpark sense of how much coverage you need. This is where you’ll have to crunch some numbers for long-term financial planning, which is a good idea anyway.
Start by adding up the cost of your ongoing financial obligations (mortgage, living expenses, student loans, children’s education, cost of replacing your income), then subtract any assets and savings. The total is the gap you’ll need life insurance to fill. Keep in mind Social Security and retirement plans take a while to kick in, so you can’t count on these investments to replace your income if you die young.
If you’re married, take into account your spouse’s needs and plans. Could they contribute an income stream to supplement the policy, and what coverage might they need to maintain expenses like childcare?
It’s usually possible to buy more insurance later on, but you’ll pay higher premiums for both term and permanent policies if you purchase them when you’re older.
8. Buying too much coverage
This is less common, but it does happen, especially to buyers with inconsistent incomes. An agent might “up-sell” you on more coverage than you need, and you may struggle to afford premium payments. Conversely, your plans may change (for example, you could plan on having children but change your mind), or you may meet other financial obligations sooner than you expect, making a larger life insurance policy unnecessary.
Fortunately, most insurance companies will let you reduce your coverage amount. It’s a good idea to find out upfront if your carrier allows flexibility here—some may allow one or two late premium payments before your policy lapses, or let you downgrade for reduced benefits.
9. Borrowing too much money from a permanent policy
One nice perk of permanent life insurance policies is that they can be an easy source of loan funds. You don’t have to jump through the hoops other lenders require, you get comparatively low interest rates, you can use the money for whatever you want, and payback terms are flexible.
But be careful—these perks make borrowing from your life insurance almost too easy. Any money you withdraw and don’t pay back will be taken out of the death benefit your beneficiaries receive, and so will the accruing interest. And if your coverage lapses or the outstanding loan exceeds the premium payments you’ve made, the loan funds become taxable, which will cost you much more down the road.
As with other loans, don’t borrow more than you anticipate being able to repay.
10. Naming the wrong beneficiary
During the buying process, you’ll be asked to name a beneficiary—a person (or business, or trust fund, or charity) who receives the death benefit if you pass away.
For parents, it might seem obvious to list your children. But minors can’t receive life insurance funds directly, so if your children are still under 18 when the claim is made, the benefit goes to their legal guardian. Unless you specify who this guardian is, the funds could get tangled up in the court process.
Another common mistake is naming your estate as the beneficiary. This might appear to make the process easy, but it often locks the funds up in long probate court proceedings, and it lets creditors access the money.
Instead, name your spouse or partner—or a parent, sibling, grandparent, adult relative, close family friend, or whomever you trust with this task. This person will handle the funds and make sure they’re used for the children’s benefit. They’ll also take charge of paying outstanding debts like a mortgage, so name an individual rather than naming your creditors.
Additionally, many insurers let you name a primary and secondary or “contingent” beneficiary who steps in if the primary beneficiary can’t. Another option is to set up a trust fund as the beneficiary, with the trust profits going to your dependents. In this case, you can specify how you want the trust money used.
If you’ve made one of these life insurance mistakes, there’s a good chance it’s fixable. If you haven’t, you can avoid them with some careful planning and get a life insurance policy that works just the way you need it to.