You wouldn’t buy a house or car without some comparison shopping. The same should be true when buying life insurance — another major purchase with long-term implications.
The number and types of products available can be confusing, causing people to make common mistakes. Here are seven of them:
Looking Only at Price
Whether buying temporary (term) or permanent insurance, consider the company’s financial strength and the policy’s guaranteed features. If you’re buying life insurance with a term policy, compare the death benefit, the cost of the policy and the insurer’s rating to competitors. Such “apples to apples” evaluation can help you get the most insurance for the longest term at the best rate from a strong company.
If you need permanent insurance instead of (or in addition to) term, also compare the assumed interest rate that each policy is offering. Decide which of all these variables is most important to you, make sure the others are equal, and then solve for the variable you’re emphasizing. A good independent, fee-based, objective financial advisor can help you do this.
Automatically Buying Term Life Only
With longer life expectancies, today’s 30-year term policies are cheaper and more cost-effective than ever, and usually best if you don’t need life-long coverage. But some people have more than one need for insurance: for example, to ensure that a surviving spouse won’t lose the home while protecting the children from estate taxes.
For such reasons, you may need a permanent policy, or even two policies — term and permanent. Your advisor can help you decide what best meets your individual needs.
Not Buying Enough Coverage
Consumers often underestimate the amount of insurance that’s needed to properly protect their families. How much money your survivors will need and how long they’ll need it are key factors in determining the amount of coverage that’s right for your family. Your advisor can help you with this calculation.
Considering Illustrations as Fact
When selling permanent insurance policies, agents like to give people a form called an “illustration” that demonstrates the cost of insurance and the future cash value of the policy. But be aware that the numbers you see on life-insurance illustrations are merely projections. They are not guarantees (unless you see that word printed there!) and the reality could be very different from what is illustrated.
The actual interest rate earned by the policy might be lower than projected, the premiums might be higher, and other costs could rise if the policy is a non-guaranteed contract. Don’t give too much credence to policy illustrations.
Viewing the Purchase as a One-Time Activity
As with the rest of financial planning, evaluating life insurance needs is an ongoing process, not a one-time product purchase. If you bought a policy 20 years ago, your death benefit may be much less than what you need today, because your income and expenses are likely higher than they were.
It’s best to review your insurance needs every few years, or whenever you’ve experienced a major change in income/expenses, marital status or the birth or death of a family member.
Are You a Tobacco User?
You’ll get far better rates if not. Tobacco users usually pay more than twice as much for insurance as nonusers. Some companies treat tobacco use more favorably than others, so it’s important to comparison shop when buying life insurance.
Cancelling a Policy Before You Obtain the New One
Term life insurance rates have dropped dramatically in recent years, making it worthwhile in many cases to switch insurance companies. But if you’re going to replace a policy for a new, lower-cost one, don’t do it until the new one is in force.