5 Biggest Life Insurance Mistakes Consumers Make

You’re ready to invest in life insurance to protect your loved ones should you die prematurely. Deciding to make this move is a good step. But it’s only the beginning. 

There are plenty of mistakes you can make while researching, applying for and paying for your life insurance policy. Fortunately, these mistakes are all easily avoidable. 

Here are the five mistakes that insurance professionals say consumers make far too often when buying life insurance. Make sure you avoid them when it’s your turn to purchase financial protection for your loved ones.

1. Don’t choose enough coverage

Gordon Conwell with American Term Life Insurance in Flourtown, Pennsylvania, says many consumers opt for too little coverage. This is unfortunate because it cancels out the main reason to buy life insurance in the first place — to protect your family.

Conwell recommends that consumers take a close look at the money it takes to run their household, pay for their children's education and make all their monthly payments. Only then will they have a real understanding of how much coverage they need, he says.

"If the breadwinner of the family dies prematurely, will you have enough money to replace his or her income or will you have to sell your home, downsize or cut costs dramatically?" Conwell asks. "What about future expenses such as college tuition or mortgage payments?"

Conwell points to a $1 million life insurance policy. That might sound like a lot of money. But depending on when the family's main earner dies, that $1 million benefit might not be enough

Say the beneficiary of that $1 million policy invests the money in an investment vehicle that earns 5 percent interest each year. The $1 million would provide the beneficiary $123,338 for 10 years before running out. That might be a fine payout if you die late enough in life. But what if you die early in life? That $1 million payout would only provide your beneficiary $76,422 a year over a 20-year period or $61,953 a year for a 30-year period.

Is that enough money? It depends on your current financial situation. If you are earning more than that $61,000 or $76,000 a year, and your goal was for your family to be able to replace your income  or at least a majority of it  that $1 million policy might fall short.

2. Didn’t buy when young and healthy

Christopher Flis, president of Memphis, Tennessee-based investment advisor Resilient Asset Management, said that young people often make the biggest life insurance mistake of all: They convince themselves that they don't need this financial protection because they are healthy.

They also try to reduce their monthly premiums by opting for a lesser amount of coverage.

The big mistake here is that young people who are healthy pay the lowest rates for life insurance. Young people, then, should lock in their life insurance at a younger age, before age and possible health issues crop up. By waiting until they think they need life insurance, young people risk paying far more in premiums.

"In doing this, they are ignoring inflation, the great expense of funding a child's developmental years, estate settling and funeral expenses," Flis says. "Term life insurance for healthy, young people is very affordable."

3. Pay more for useless perks

Joel Ohman, a certified financial planne, says too many consumers spend extra money for a life insurance policy that comes with extra features that they don't need.

Some life insurance policies might include a disability rider that pays a portion of your income or a monthly benefit if you are not able to work because of an illness or injury. Some policies might come with critical illness riders that pay out when you are diagnosed with a critical illness.

But Ohman says consumers should focus on the main purpose of a life insurance policy when taking one out, a payout when you die that will provide financial protection to your loved ones. Investing in a life insurance policy that provides additional benefits is usually a waste of money, Ohman says, because of the high premiums such extras require.

"It's very rare that you need any type of fancy life insurance policy other than a plain-vanilla term life policy," Ohman says. "Term life is simple, straightforward and likely much cheaper than you think."

4. Don’t research insurance carrier

ReKeithen Miller, certified financial planner with Palisades Hudson Financial Group in Atlanta, says it's one thing to review the fine print of your life insurance policy, but equally important to review the financial health of the insurance company providing the policy.

Insurance companies, like all businesses, can run into financial problems. If your insurer's problems are severe enough, it might not be able to provide your beneficiaries with the death benefit they need to ensure their financial security.

"It doesn't matter how great your insurance policy performs if the carrier can't make good on its promise to pay when the time comes," Miller says.

Miller recommends consumers review the credit ratings of their insurance carrier and their financial results.

"A company with a poor credit rating may be in danger of not being able to fulfill its financial obligations," Miller says.

5. Shop around too much

JC Matthews, an insurance agent and co-founder of online insurance provider Simply Insurance, said that some consumers spend so much time shopping around for life insurance that they gather too much information. This becomes overwhelming, and prevents them from pulling the trigger on any policy.

"They get super excited about shopping for insurance and get quotes for term life, whole life and universal life. Then they get 10 quotes for each one," Matthews says. "They don't really understand how each one works."

Consumers then get confused.

They worry that the entire process of buying life insurance will be overly complicated. Discouraged, they pass on signing up for any policy, Matthews says.

Matthews says consumers get past this in one of two ways. They can work with a single insurance agent who can provide them quotes from multiple insurance carriers or they can also search insurance comparison sites online. These sites, too, will provide multiple quotes. Consumers can then look at the quotes, compare the coverage options that go with each quote and call those insurers that interest them.