Four Mistakes to Avoid When Buying Term Life Insurance

When buying term life insurance, there are at least four mistakes to avoid, and doing so will ultimately save you both time and money. Since life insurance policies are a “done deal” once they are issued, you want to be sure that you avoid these mistakes at the time of application.

What are the mistakes?

1. Choosing an inadequate term

Since buying term life insurance is typically driven by the desire to save money, you could go overboard by selecting an in adequate term. For example, you may decide to go with the shortest term possible – say, five years – as a way to keep your annual premiums to an absolute minimum. That may save you some additional money, but it may be insufficient for the time you need coverage.

Let’s say that you have two young children – will a five year policy be a sufficient term in your situation? Absolutely not. You will probably be best served by having at least a 20 year term policy. That will provide sufficient time for your children to finish high school, and maybe even college as well.

By contrast, if your children are in high school, you may be adequately served with a ten-year term policy.

When choosing a term life insurance policy, it is always important to match the term with your anticipated needs. While it is possible to roll a short-term policy over into another of similar length, the cost will be higher when you do because you will be older at the time. The longer term of the policy ensures that you’ll be covered for the time that you need, and at the lowest possible cost.

2. Not buying enough coverage

One of the advantages to buying term life insurance is that, since it is far less expensive than whole life insurance, you can buy more coverage. But there’s often the temptation to save even more money by buying minimal coverage.

As example, let’s say you have an opportunity to buy a $100,000 whole life policy at a cost of $1,000 per year. But you find that the same amount of coverage can be had in a term policy for just $150 per year. You go with a term policy at $100,000, and save yourself $850 per year.

Good deal? Maybe not.

Since the term policy is so much cheaper, it might be a better idea to invest at least some of the savings in a larger amount of coverage. You can decide to take a $200,000 term policy for $300 per year. In that way, you will double the amount of coverage that you would have had under the whole life policy, but you’ll still be saving $700 per year. THAT’S a good deal!

Whatever type of life insurance policy you select, you have to be sure that it will enable you to provide an adequate amount of coverage for your family in the event of your death. That’s the main purpose of having life insurance in the first place!

If you’re buying life insurance, spend some time determining the right amount of coverage for your circumstances. Buying the lowest coverage at the lowest price isn’t usually the best strategy.

3. Thinking the initial quote is guaranteed

Whenever you apply for an insurance policy of any kind, you’ll get an initial quote based on all of the known circumstances related to your situation. But it’s critical to understand that the initial quote is subject to change.

After you submit your life insurance application, it will undergo an underwriting process unless you apply for guaranteed issue coverage. That will include an investigation of medical records and driving records, and quite often, credit history, employment history and criminal background. In addition, you may be subject to a medical exam. Each of these investigations holds potential to change your initial quote. Though there is a possibility that it could lower the quote, far more often it goes the other way.

Never assume that the quote you receive upfront is guaranteed in any way. This is especially important if you’re shopping for rates. Just because you got an attractive rate quote from one insurance company, doesn’t mean that that is the rate that you will get when the policy is issued.

4. Not being completely truthful

One of the major reasons why your actual life insurance premium may be higher than your initial quote is if you are not completely truthful in your application. The initial quote will be more favorable if you do not disclose certain negative health information, which will mean that the quote was never actually valid.

This has important implications when you’re shopping for quotes. Unless you are completely truthful about your health situation, you’ll gather lowball quotes that will have no bearing on reality. This is particularly significant if you’re working with a competent insurance agent or broker. Since life insurance companies take different positions on various health concerns, the agent or broker will be able to get you better – and more reliable – quotes from companies that take a more positive view of whatever your health condition might be.

Being completely truthful in the shopping process and on the application will ultimately save you both time and money.

Neal’s Notes – As you know, I take the issue of life insurance very seriously as a result of my own story.  Take care of this – but take the time to do it correctly.  I hope your family never has to rely on the proceeds of your life insurance.  But if they do, make sure you have the best coverage that really takes care of your loved ones.