How Not To Buy Wrong Life Insurance

Traditionally, life insurance is not bought — it’s sold. People often go through a decades-old sales process that isn’t wholly customer-centric and often pushes them toward an expensive policy that may not even fit their family’s needs. That sales process also involves risk assessments based on bloodwork and medical tests, which can feel invasive and be time-consuming for applicants.

As a result, over 40% of Americans do not carry any life insurance, according to a recent survey, and almost half said they would be more likely to buy it if the process were easier.

A number of companies have launched bids to transform the system and allow consumers to take ownership of the life insurance buying process and obtain affordable coverage quickly. But change takes time. In the meantime, here are six ways people end up buying the wrong life insurance policy (or avoid buying a policy altogether). Hopefully, knowing these will help you avoid some common insurance mistakes and help you choose the right coverage for yourself and your loved ones.

1. Assuming You Don’t Need It Now - Life insurance gets more expensive as people age. Kick the can down the road, and you are all but guaranteed higher premiums.

2. Having The Impression Employer-Provided Life Insurance Is Enough - Getting coverage through an employer can be as easy as checking a box during open enrollment. However, just because it is part of your employee benefits, doesn’t mean it offers enough coverage to protect your loved ones. Employer-issued life insurance policies typically amount to a year’s worth of salary, oftentimes less. This amount of coverage may be enough for a young, single professional whose only concern is ensuring that were the unthinkable to happen, any end-of-life expenses would be paid for. But it’s not enough if you have dependents who rely on your income for support.

3. Thinking Life Insurance Agents Are Financial Advisors - Agents may seem like counselors or consultants, but it’s important to do your own research and validate their advice before taking it. In some cases, agents might be licensed financial advisors, but they earn a commission for selling life insurance. So it’s important to know if what you’re buying is best for you and your family.

4. Thinking Of Life Insurance As An Investment Vehicle - Like auto, home and renters insurance, term life is a straightforward product: Customers pay a premium to an insurer to protect against the unexpected for a set period of time. Rather than protecting against burglaries, fires and fender benders, a life insurer bets that the customer will outlive the term of their policy (usually up to 30 years). If the customer outlives the policy, both sides have reason to celebrate; however, if the policyholder passes before the term’s expiration, the insurer pays out the coverage amount to the beneficiaries.

Compared with term life insurance, permanent life insurance policies generally have much steeper premium costs . This is because permanent life insurance products are “enhanced” with a savings or investment component that accumulates a cash value that you can borrow against — meaning the insurance company takes a chunk of your premium to start an investment account. Some experts consider these policies to be bad investment vehicles because in many cases, they are designed to maximize the agent’s commission (not make you retire wealthy).

5. Taking The Cash Value Bait - Portfolio. Dividends. Cash value. These words are scripted to make life insurance sound exciting. It’s how consumers inquiring about life insurance end up being sold underperforming investment products.

Keep in mind that for the first few years, little to no cash value is actually accumulated. Most of the premiums are used to cover fees and the death benefit. If you happen to lapse the policy early, you will get nothing. After a few decades, the cash value could be a nice nest egg: You may be able to withdraw some of it when you need it, or you can pay a fee to close your policy and collect all of it — but then you lose your life insurance coverage.

You can also borrow money against the cash you have saved. In other words: You have money, and the insurance company is holding onto it for you. You may not be able to use that money, but you can borrow other money (and pay interest to do so). When you die, the insurance company absorbs the cash value — it is not distributed to your beneficiaries.

6. Falling For The ‘Bundle And Save’ Trick - Another thing to be wary of is being promised big discounts if you get all of your insurance policies from the same carrier. Convenience becomes a priority over having the best policy, and a small discount on car insurance (or whatever else is being bundled in) won’t necessarily offset the extra cost of the life policy, either.

There is no reason to make these purchasing mistakes or be persuaded by dated sales tactics. Your family and loved ones count on you day in and day out. By avoiding these common life insurance pitfalls, you can ensure they can continue to do so after your passing.