1) Make sure your age, family history, smoking status, and any medical or weight issue you have is compatible with the insurance company you choose!
When selecting life insurance I’m reminded of that old motor oil commercial with the billowing smoke trailing the driver’s car as he proclaims “motor oil is motor oil.” The point of the commercial and my point with respect to choosing which life insurance company to work with, is that there are many different companies or “carriers” and your particular need or health situation may require you to choose the best carrier for you, not what was great for your uncle Bob or friend! He may not have your family history of cancer or heart problems, or may not have your medical condition.
The mistake I often see is a client knows an agent who represents a well known life insurance company or the client may have car insurance with one of the large auto insurance companies and assumes that their life insurance products must be a great fit for them because the company is well known. The problem is that you may overpay by as much as 20 to 50% for coverage from a company that didn’t really want your business at a fair price and priced their coverage to discourage you. They may cost 25% more to cover all the advertising they paid for to get you to know them well! Conversely, there are always companies or carriers that want your business and price their coverage more favorably than most others. While it may be true that for really healthy young people who only want a short duration term policy all prices are fairly inexpensive, there are many companies that offer a better price or coverage for your specific need or medical condition, especially if you want the coverage to last your lifetime or 20 to 30 year “term.” There are even companies that will offer a small amount of coverage to you even if you are at death’s door. The life insurance market is dynamic and the carriers who may offer the best rate today for an older person, smoker, diabetic, or cancer survivor may not be the best for that condition in 2 years. (see mistake # 5 for a solution)
2) How to solve the age old question of term versus permanent life insurance
Many people struggle over what is the best life insurance coverage for their situation in life. Term coverage is inexpensive and offers a lower cost for a certain period of time or “term” such as 20 years. Permanent insurance is designed to last until the end of your life and provides the “death benefit” coverage amount tax free to your family, trust, or charity.
Clearly the need for a large amount of life insurance is most critical when people are young and raising a family. The loss of their income and contribution to the family would be devastating should they pass away while kids are young or a family would be saddled with a mortgage payment they could no longer afford. Experts believe coverage for a young wage earner with a family should be as much as 20x their wages.
The problem I encounter is that the majority of people with a young family fail to realize that they may also need life insurance after the family has been raised despite their hope that they will make their “fortune” by retirement age and live comfortably on their accumulated assets. In most cases the people that reach retirement age still have a mortgage to pay off, a loss of income or pension if a spouse dies, and children or grandchildren that could benefit greatly by the tax free payment of a life insurance death benefit. When a person realizes that an expiring term policy needs to be replaced with something permanent, they may have medical problems or other issues that make new life insurance unavailable or very expensive.
There are two solutions to avoid this mistake. The simplest is to combine low cost 20 or 30 year term insurance with a smaller permanent policy that lasts until age 95 or age 100. An example would be a 40 year old married male gets a 20 or 30 year term policy for $750,000 and a $250,000 permanent whole life or no lapse Universal Life policy. If budget is a problem and the insured is healthy, a solution would be to get a term policy with a company that A) is known to have good permanent life products and B) allows you to convert all or a portion of your term policy into those permanent products up to age 70. In the second case, you can lock in low cost term coverage but convert a portion of the coverage when you can afford the extra cost of permanent coverage.
3) Why relying on accidental coverage or a group or trade association life insurance plan may be a trap.
A common mistake I find is reliance on accidental coverage and group term life plans provided by an employer. People think “I’ve got that coverage so that issue (of my family losing my income etc) is taken care of.” The problem with accidental coverage is that most deaths don’t qualify for payment of the death benefit. You even hear horror stories of a person getting into a serious accident but they die weeks later of complications and the coverage is null and void. True “life insurance” should cover any death.
The problems with group life insurance from work are several. Group life is offered as a condition of working for that employer and is usually not portable so the day you get fired or leave for another job is the day your coverage ends. The same is true with the old “mortgage protection” life insurance. If you sold your home and got a new mortgage the coverage did not follow you. This is bad because your next employer may not have a plan or it may be very expensive. Group life term plans are based on the average health of the group similar to medical group plans. That means group life is a better deal if you are unhealthy but more expensive if you get your own insurance with a good health rating.
The second big problem with group health plans is that they are very inexpensive when you are young just like any life insurance, but the cost to you goes up in incremental 5 year bands based on your age. I have found that the cost is punitive after age 55 and off the chart after age 60. Many people I meet don’t even know what they are currently paying for their group term because it is taken out of their paychecks and hard to decipher the exact amount.
There are several solutions for these traps. It is OK to have some low cost accidental and group term life insurance, especially if your employer is paying for some of the cost. However, I strongly recommend you also have your own portable life insurance policies that you own and control. I view group term life as short term coverage that should be dropped when it becomes too expensive. Two specific solutions would be to get your own 30 year term policy with conversion rights mentioned above in mistake # 2, or to obtain a permanent policy on your own so that when you leave your job or your cost for work coverage becomes too great, you have your own permanent policy with the price established.
4) Don’t assume your old policies are meeting your current needs.
One mistake I frequently see is that people who bought permanent insurance 10 to 30 years ago assumed that the policy would last until they died or “good for life.” They might get an annual statement telling them how the policy is performing or trending and just throw it away or in a file without review. The problem is they may have purchased an old Universal Life policy which was designed to balance a flat “lifetime” payment with the expectation that the policy’s cash value would earn enough interest income from the insurance company to build a large war-chest of cash that would help carry the more expensive life insurance costs in later years. The problem with those old policies is that they were projected based on much higher interest rate payments on the cash balance than they are currently earning. If you compound interest at 8% over 35 years it is a much greater amount than the rate actually being paid on those old policies such as 4.5%. The result is the policy does not last as long as it was projected to last and people that don’t pay attention will have their policies lapse in their 60’s and 70’s instead of their 80’s and 90’s as expected! This problem is compounded if the person borrowed or withdrew money from the policy thinking it was a savings account they could tap at any time. Most people don’t understand that the policy needs that cash to make it last as it was designed. In fairness to the old policies, who expected such historic low interest rates? Many people are reaping a much greater benefit from these low rates from historic low mortgage rates.
The other problem with many of these old policies, especially with respect to men, is that men were supposed to die at much younger ages 20 years ago. In reality we are living much longer and we need our permanent policies to last longer. The good news is that the life insurance industry has corrected this problem by offering Universal Life policies that can be guaranteed to a certain age all the way up to 121. Of course “whole life” polices are always designed to last until age 100 or longer but require more premium payment than Universal Life. I strongly recommend people review their policies and if there is a problem and they are still healthy, they should exchange their old policy for one with a “no lapse” guarantee until at least age 90. If they are unhealthy they should check to see what increase in payment they need to make the old policy last or reduce the coverage to make it last longer with less death benefit.
The other mistake I see often is people with term life policies that are close to maturing don’t check to see what their options are to convert the term policy to a permanent policy before they lose that right. This is especially true when the person with the term policy has developed health problems and obtaining new insurance would be difficult and/or expensive.
Lastly, I see many people with a $50,000 policy or $100,000 life police that is 20 years old and seemed like a lot of money back then, but now they have a $400,000 mortgage and higher income from their job and they are very “under insured” with their old policy. They need much more coverage even if they get term coverage.
5) Don’t select a “captive” agent who only has one or limited carrier options to choose from.
This mistake is very linked to mistake # 1 above because if you go with a New York Life or Northwest Mutual agent, they may have good pricing for some people but not good value for your needs. They usually try to tell you they are highly rated and you must have the very best rated company or you are taking a big risk. It’s called the fear technique of selling but it’s very overblown. As an independent agent I represent over 30 companies with A to A+ ratings that I am very comfortable with for my clients. We competitively shop for cars, house insurance, electronics etc. Why not life insurance?