In some ways, buying life insurance on your own is easier than you probably think. The process takes a couple of weeks, but there are only a few steps: you fill out an application, you undergo a short medical exam at your home or work (your choice), and you wait to see what the premium will be. And if you follow our advice, you only shop for term insurance and you only buy as much as you need, because you took our free Insurance Checkup and figured out your insurance coverage gap.
That's the easy path, and ideally the one you'll take. But some shoppers stumble during the process, and end up buying the wrong amount of insurance, or the wrong type of policy altogether. So here are five common mistakes people make when buying life insurance. Don't let them happen to you!
Mistakes when buying life insurance
Mistake 1: Mixing your retirement savings with your life insurance.
Whole (aka permanent) life insurance policies are sometimes marketed as investment products, because they have a cash value that can grow over time. It usually makes better sense to keep your retirement savings and your life insurance separate unless you've got a significantly large estate to deal with. To put it another way: if you're not already talking to your attorney, accountant, or financial advisor (an insurance agent doesn't count) about how to creatively use whole life insurance, you probably don't need it. Stick with term.
Mistake 2: Buying too little coverage because you've chosen an expensive product.
Here's another reason to avoid whole life insurance. Because it costs so much more than term, people often have to cut back on the amount of coverage they buy in order to afford the premiums. But if you're not buying enough insurance coverage to actually cover your risks, you've sort of defeated the purpose. Figure out your coverage needs and then shop around for that much coverage, no less.
Read more ways to build your life insurance expertise
Mistake 3: Buying too much coverage because you've overestimated how long you'll need it.
Term life insurance is designed to cover you for a set number of years, usually in your middle years or younger and when you're still in the "wealth-building" phase of your career. Typically as you grow older you have fewer debts (the kids have finished college and you've paid off your mortgage) and more wealth (your retirement savings has continued to grow), which means you won't need as much life insurance. It's important to estimate your current and projected needs accurately so you don't buy more insurance than you need. (If only there were a tool that could help you figure out the amoun― oh look! An online instant Insurance Checkup!)
Mistake 4: Relying on the policy your employer offers without making sure it provides adequate coverage.
Employer-provided life insurance is a pretty sweet deal, but it's also typically less than you actually need to cover all of your risks. We call the difference between your financial risk and current coverage your "coverage gap." Figure out that gap and then cover it.
Sometimes you can take your employer-provided life insurance policy with you when you leave a job. If you can't, make sure you fill in the gap left by the missing policy quickly, either through a privately purchased policy or one from your new employer.
Mistake 5: Failing to review your financial needs regularly to make sure you have the right amount of coverage.
Life insurance isn't a set-it-and-forget-it type of product, but a lot of people don't realize this because they mistakenly think of it as something that's supposed to last an entire lifetime. (See mistake #3 above on why that's the wrong approach.) Instead, think of each big life event―a new job, a new home, a new child―as a sign that it's time review your overall financial situation. It's likely that your insurance needs will have changed too.
The good news about the five mistakes above is that they're easy to avoid. Just keep in mind that it's smarter to shop when you know what you need to buy, so if you've still got questions, head over to our Life Insurance Guide for more expert advice and clear summaries of important terms.
Photo: J D Hancock