What You Should Never Do When Buying Life Insurance

Life insurance serves a crucial purpose by ensuring loved ones are financially stable in the event of a death. The most fundamental part of this coverage is known as a death benefit, which is a lump sum of money paid to beneficiaries when the policyholder passes. Many insurance policies have additional benefits and broader coverage, but the posthumous payout is the core idea behind life insurance.

According to Consumer Affairs, just over half of Americans report having a life insurance plan. Revealingly, this is down from 63% about a decade and a half ago. At the same time, 102 million people desire to have more coverage. Even with nearly one-third of Americans seeking greater benefits, the life insurance market is projected to hit about $4 trillion by 2028. Meanwhile, confusion runs rampant in this multi-trillion-dollar industry.

Western & Southern Financial Group estimates that one out of every five people mix up life insurance with retirement plans or medical coverage. Of those who have a policy, nearly three-fourths never check in with their provider to follow up on their coverage. A misunderstanding of these crucial plans can result in overspending, insufficient coverage, and poor timing, among other challenging factors. To help people better manage their plans, let's look at the 12 things you should never do when buying life insurance.

Early in their higher education or careers, most young Americans aren't giving too much thought to the best age to start saving for retirement or the ideal time to sign up for life insurance. This lack of immediate concern is partially justified, given that life insurance isn't considered essential for everyone, unlike health insurance. As the Texas Department of Insurance explains, life insurance policies start to make sense when you have dependents, such as a spouse or children, who rely upon your current income for support. Another consideration is debt burdens that could be inherited by your family. Generally speaking, Americans who fall outside this category have no absolute need to have life insurance.

Purchasing life insurance, even when you don't require the coverage, may seem harmless at first. After all, the average 30-year-old female only pays $22.46 monthly, while the typical male's premium stands at $27.23, according to Self Financial. That's only $269.52 to $326.76 per year for coverage that can confer a sense of protection and security. However, these seemingly insignificant costs add up over time, and individuals without dependents really cannot benefit from life insurance in any meaningful way. It doesn't hurt to familiarize yourself with the process or coverage before you need it, but pulling the trigger prematurely creates an unnecessary financial burden. If you're wondering, there is a best age to buy life insurance.

Perhaps a greater risk than signing up for coverage too early or assuming coverage when you don't need it is applying too late. Similar to health care providers, life insurance companies judge their coverage costs largely on the calculated risks associated with a policyholder. Naturally, older individuals pose a higher risk given their age and associated health deterioration. Every person's circumstances are assessed individually, but life insurance rates tend to be lower the earlier you sign up. The trick is striking a balance between paying unnecessarily for coverage you don't need and overpaying because you waited too long.

It's impossible to determine how much your specific premiums would increase based on when you sign up for insurance without going through the process, but some providers offer estimates. Farm Bureau Financial Services estimates that the average person's life insurance costs could rise by 8% to 10% annually. For perspective, waiting only five years could spike your costs by 40% to 50%. Instead of percentage differences, Experian offers concrete figures. For a $500,000 policy, a 20-year-old female and male will pay $22.65 and $30.20 per month, respectively. These premiums rise dramatically to $194.16 for the female and $268.04 for the male when their age hits 60, when looking at the same coverage amount.

Confusion is rife within the life insurance space, and the blame cannot entirely be laid at the feet of consumers. Just when you get a grasp on what life insurance offers in general, you find out there are different kinds. Instead of brushing these seemingly inconsequential distinctions aside, understanding their details is vital for making sure your policy aligns with your needs and goals. Although many discrepancies exist, the most important dividing line arguably exists between term and whole life insurance. As the name suggests, term policies last for a fixed period, usually a few decades. Policyholders pay a monthly premium in exchange for the insurance company's guarantee that a predetermined amount of money, known as the death benefit, will be paid to their beneficiaries if they pass away.

This is the most commonly held and straightforward policy. Whole life insurance doesn't have a defined time limit, remaining active so long as premiums are paid. These alternative policies also come with a cash value component, which is often advertised as a savings or investment mechanism. The combination of permanent coverage and this savings account leads to a higher premium for whole life insurance, compared to term coverage. Given the elevated monthly cost and the somewhat gimmicky savings account, Dave Ramsey says you should avoid this type of life insurance.

The distinction between term and whole life insurance policies isn't the only nuance to consider. Another common mistake you should never commit when buying life insurance is confusing the varying types of premiums. Under the umbrella of term life insurance, there are annual renewable premiums (ART) and term premiums. Monthly ART payments tend to be higher because they're associated with more flexible policies. Standard premiums cover basic term life insurance policies that last for a fixed period, such as 10, 20, 30, or 50 years. Notably, these premiums are fixed. On the flipside, ART premiums can fluctuate over time because they're associated with more flexible policies.

When a conventional term life insurance policy ends, and you want to remain covered, you often have to undergo the application process all over again. With ART premiums, you have a renewable policy that can simply be extended when the term limit is reached, usually on an annual basis. Every time this flexible policy is renewed, the premium increases. Policygenius recommends only using ART premiums for short periods when financial pliability is essential. For the rest of the time, standard term life insurance with predictable premiums is a much more affordable choice.

Now that you know when life insurance is appropriate, and you can distinguish between different policy types, the selection process is a cinch, right? Unfortunately, it's not that easy. Another mistake people make when buying life insurance is assuming all providers offer the same coverage. Your circumstance may be the common denominator, but insurance companies have company-specific factors that can widely sway your coverage and premiums, such as profit margins, operating costs, risk assessments, and coverage extent, just to name a few. According to the American Council of Life Insurers, more than 700 independent life insurance providers operate in the U.S. alone.

You can imagine how this sheer variety can reflect in a broad spectrum of coverage options. As the North Carolina Department of Insurance notes, shopping around for different policies is a necessary step in finding the best coverage and premiums to match your needs. An insurance provider should be more than willing to provide a free assessment based on your information. It's advisable to compare various types of life insurance at once to avoid the risk of premiums rising, since most companies only guarantee the quoted price for a fixed time period. When considering different options, remain aware of the sneaky ways insurance companies trick you into spending more.

Many people don't feel the pressure to shop around for life insurance when it's offered by their employer. This is actually a fairly common practice. The Bureau of Labor Statistics estimates that 62% of Americans active in the labor force have access to employer-sponsored life insurance. Usually, the larger the company, the greater the chance that life insurance coverage is offered. Notably, the participation rate is 61%, which means 98% of workers who have the option take advantage of it. While there's no denying the convenience of simply signing onto a policy offered by your employer, it's a mistake to automatically assume the coverage is sufficient for your needs.

Most often, employer-sponsored plans take the form of group life insurance policies. These multi-person plans allow larger entities to acquire insurance coverage for various policyholders at once, without the friction of individual medical exams or risk assessments. Yet, this usually means less personalized coverage, potentially leaving gaps. Beyond limited coverage, these plans also remain dependent upon your employment, introducing risk into a critical part of your family's financial planning. There's nothing inherently wrong with joining an employer's life insurance plan, but it must be followed up with diligent consideration of blind spots to determine if supplemental or even replacement plans are necessary.

The core of any life insurance policy will be composed of monthly premiums paid in return for a defined death benefit for beneficiaries in the event of a policyholder's passing. However, most life insurance providers offer several voluntary attachments, commonly known as riders, which can make the selection process more challenging. It's important to bear in mind that these add-ons aren't usually inherently a good or bad choice, at least when considered in a vacuum. Only when you consider how they could play into your circumstance can you determine their merit. Still, there's a small minority of insurance products that are a complete waste of money.

Yet, some people make the mistake of accepting a bunch of random riders without doing their due diligence, which only leads to higher premiums for no reason. Alternatively, blindly waiving off all additional features may prevent you from acquiring appropriate coverage. It's advisable to speak with your advisor in-depth regarding their riders to determine what fits your needs and what doesn't. Forbes highlights some of the most common life insurance add-ons, such as premium nullification in the event of disability or tapping into the death benefit to cover long-term medical costs or unforeseen emergency bills.

Another common mistake that you should never make when buying life insurance is sacrificing coverage to secure a lower premium. Although your age and health are the primary drivers of these monthly costs, the policy amount and duration also affect pricing. To be sure, the dollar figures commonly associated with a policy name refer to the death benefit paid to a policyholder's beneficiaries in the event of his or her death. When looking at term life insurance, the time period refers to how long the policy lasts. So, for instance, a 20-year $500,000 life insurance policy lasts for two decades and pays out half a million to a policyholder's beneficiaries.

It can be tempting to tweak these two variables when trying to secure lower monthly costs, but it's vital to understand the disproportionate impact of this move. What looks like a small tweak to premiums can have an outsized effect on your policy coverage. Looking at the most recent life insurance averages can help demonstrate this nonlinear connection. According to Policygenius, the average 40-year-old female pays about $21.55 monthly for $250,000 in coverage for a 20-year policy. All else remaining equal, increasing the coverage amount to $1 million would raise the premium to $61.03. In this scenario, a $39.48 in monthly savings translates into a $750,000 reduction in a policy's death benefit.

The structure of life insurance is deceptively straightforward: a policyholder's death automatically triggers the payout of a predetermined death benefit amount to beneficiaries. This oversimplified interpretation, as accurate as it may appear, ignores the important role of policy exclusions. Similar to health insurance's selective coverage, life insurance doesn't automatically pay out for all forms of death. Known as policy exclusions, these exceptions are found within the fine print of your life insurance contract. It's vital to understand these causes of death, which can effectively nullify the entire point of life insurance. This is a common practice in the industry to help manage risk and protect against fraud.

Some common life insurance exclusions involve behavior of the policyholder, such as death resulting from inherently dangerous or illegal activities and outright fraud. More sensitively, most life insurance companies refuse to cover death resulting from preexisting conditions or murder by the beneficiaries. More generally, acts of war are also commonly excluded from covered deaths. According to the Legal Information Institute at the Cornell Law School, the majority of life insurance companies also have a suicide exclusion period, usually lasting two years, wherein a death benefit won't be paid out if the policyholder ends their life.

As mentioned before, life insurance providers assess their risk based primarily on the age and health of the individual. While you cannot change your age, your lifestyle is a controllable variable with a lot of impact on your monthly premiums. For example, Policygenius estimates that smokers pay about 286% more than their non-smoking counterparts for identical coverage. Similarly, LifeInsure.com reports that smokers spend about two to four times the normal rates for non-smokers. What's colloquially known as the "smoker penalty" isn't an arbitrary punishment, but a reflection of the heightened risk insurers assume when covering a smoker due to the slew of health complications associated with this behavior. Insurance companies are notorious for their extensive and data-heavy risk assessments, and this is one of the quickest ways to raise red flags.

Given this steep financial penalty, some people may be tempted to omit this crucial piece of information on their health assessment when signing up for life insurance. However, insurance providers are extremely motivated to root out fraud and have extensive resources to detect it. If you're wondering how a faceless insurance giant could know about your personal health or habits, there is a straight answer: the Medical Information Bureau. As the Consumer Financial Protection Bureau explains, this well-funded company specializes in collecting health data about individuals for life insurance providers. This data is compared against the self-reported information from individuals applying for life insurance coverage.

Life insurance is intended to provide coverage over an extended period of time, which is why many people don't consider the process of cancellation from the onset. Yet, this is another thing you should never do when buying life insurance. Term life insurance policies don't usually come with any penalties if you want to cancel, other than ending your coverage and losing out on the premiums you paid up until that point. On the flip side, whole life insurance plans typically penalize policyholders for leaving, especially shortly after signing up. This coverage tends to come with what's known as a surrender period, usually lasting for a few years after you sign up. If you terminate the whole life insurance coverage within this timeframe, you could face a hefty surrender penalty. 

Additionally, the cash value you've built up isn't automatically handed over. Within the surrender period, some insurance providers simply keep these savings. According to Policygenius, surrender periods can last up to 10 years. Even after this period ends, policyholders of whole life insurance plans are still unlikely to get their full cash value and could still face a surrender fee, albeit lower than during the surrender period. While you may not be able to avoid these clauses if you opt for whole life insurance, it's important to understand their impact before signing up. These steep financial penalties add to the reasons life insurance is usually a bad way to save for retirement. 

It can be tempting to cross off life insurance from your to-do list and never worry about it again. However, the amount of coverage you need can shift over time as your personal and professional life changes. Setting and forgetting your policy is something you should never do when buying life insurance. You put yourself at risk of finding out you need particular coverage when it's too late. Some of the most common changes that could impact your coverage needs include getting married, having a child, receiving a promotion, starting a new job, losing your job, and going through a divorce. To be sure, even a financial planner says you need to update this asset when your spouse gets ill.

Of course, life insurance isn't going to be top of mind when going through major life changes, which is why professionals recommend an annual life insurance review. By automatically assessing your coverage, you avoid the risk of missing crucial coverage. At the same time, you also prevent overpaying for protection you don't need. If you're using term or whole life insurance, this annual review can happen at any point since there's no renewal period. However, if you have life insurance with ART premiums, try to time your annual reviews before your policy automatically restarts.