If you follow financial advisers like Bob Brinker or Dave Ramsey, you probably know that you’re better off buying term insurance and avoiding any type of life insurance coverage that promises to build a cash value.
Term life insurance is the simplest and most affordable type of life insurance available. It provides the largest amount coverage, for the least amount of money. However, with all the term options available, selecting the right policy and the best company for your needs can be overwhelming.
To help you save money on the cost of your coverage, and ensure that your family is adequately protected, we have compiled a list of the most common term life insurance mistakes to avoid.
6 Term Life Insurance Mistakes to Avoid:
1. Waiting Too Long to Buy Life Insurance
2. Buying Too Short of A Term Policy
3. Purchasing Life Insurance From An Auto Insurance Company
4. Purchasing an Insufficient Amount of Life Insurance to Replace Income
5. Purchasing Unnecessary “Riders” On Your Life Insurance Policy
6. Forgetting to Review Your Life Insurance Policy Each Year
For most people, buying life insurance is like filing income taxes. It’s something we tend to push off as long as possible. Death and taxes are inevitable though, so don’t wait until you receive bad news about your health to buy life insurance.
Way too often we’re called by the spouse of someone over 50 seeking life insurance. They were in “perfect health” until one issue arose…and now they’re uninsurable. As an insurance agent, husband, and father, I can tell you that these are the hardest calls to make. No one wants to tell a potential client that they weren’t able to qualify (“declined”) for life insurance.
This is one of the reasons we represent more than 60 top-rated life insurance companies. Every life insurance company has their own underwriting guidelines, and some companies are more lenient with health issues than others. By working with dozens of top-rated insurers we can shop the market to find the best rates for your unique health profile. But this doesn’t mean you should put off buying life insurance, shop while you still have plenty of companies competing for your business!
Bottom Line: The cost of insurance never improves with age, and after the age of 50, life insurance rates typically increase by 12-15% per year. Lock in your rates now while you are young and healthy, and avoid increasing rates as you age, or the possibility of a being ineligible for coverage due to changes to your health.
Term life insurance is usually sold in 10, 15, 20, 25, or 30 year periods. During the term of your policy, your rates and coverage are guaranteed not to change. The term lengths available to you are determined by your age, and the life insurance company you’re applying with. As an example, only a handful of life insurance companies offer 30 year terms to applicants after the age of 50.
With term life insurance, the longer your term is, the more expensive your policy will be. Life insurance companies rely on statistics, and the longer your insurance policy extends coverage, the greater the odds of something happening to you become. While it will be more affordable to secure a 10-year term policy, you should consider spending a few extra dollars each month to purchase the longest term you can afford.
If you no longer need life insurance in the future, you can easily cancel your policy with no penalties or obligations. In addition, some life insurance companies will allow you to reduce your policy’s death benefit and the associated cost of your life insurance. Even if you have no major debts, having a small amount of coverage is always better than having none.
Conversely, if you buy a 10-year term policy and need to reapply for a new policy, plan for sticker shock! In ten years, your rates will be at least double what they are today, assuming you have no new health serious issues, and you still weigh the same.
So, what is the correct term to initially buy?
No two family and financial situations are identical…If you haven’t had children yet, and plan to have children in the near future, we recommend buying a 30-year term. If your children are a few years old, a 20-year term may be sufficient, depending on the amount of years that remain on your mortgage, or your planned retirement age. If you don’t have children, we recommend purchasing a term that will extend until your mortgage has been paid off, or until you reach your planned retirement age.
If you need help determine the best term for your specific situation, feel free to give us a call toll-free at: 855-902-6494, and one of our experienced agents can help.
Many people mistakenly believe that the insurance companies that advertise the most are also the least expensive, or the most financially stable. An example, let’s compare State Farm to Prudential Financial. Both insurance companies have a solid track record of paying their claims, and both companies are “Superior” rated by AM Best for their financial stability. In 2015, Prudential controlled 5.52% of the market share for life insurance in United States while State Farm only controlled 2.65%.
As a consumer, it’s also important to know that life insurance is just like every other commodity. By having a larger market share, a company like Prudential can afford to be more aggressive with their rates and more lenient with their approvals and underwriting.
Don’t get us wrong, companies like State Farm and Farmers are good companies that pay their death claims. However, their underwriting guidelines are much more rigid which makes it very hard for an individual to qualify for their less expensive rate classes, even if they are in excellent health. As an example, to qualify for State Farm’s best rate class, your total cholesterol must be under 180. An “A+” company like United of Omaha on the other hand offers their top rate class to healthy individuals with a total cholesterol of up to 275.
In addition to offering more favorable cholesterol guidelines, companies that specialize with life insurance also tend to have more favorable guidelines for an applicant’s build, blood pressure, family history, etc. You’ll generally save at least 30% to 40% by shopping the market and purchasing your life insurance from a company that specializes with life insurance.
Below we’ve provided a side-by-side comparison of “A+” rated Legal and General’s guidelines to State Farm.
In addition, strict underwriting requirements, big-box home and auto insurance companies also have been under scrutiny for passing the cost of their advertising campaigns onto their customers. Airing a single TV commercial during the Super Bowl carries a price tag of almost $5 million dollars, and this doesn’t include the cost of filming or production.
A recent article from Insurance Business America points out that companies like Allstate and State Farm are among the biggest spenders in the insurance industry, spending almost a billion dollars a year on their advertising campaigns.
So, who’s really paying for these TV commercials?
These advertising costs trickle down to the consumer resulting in higher premiums. As Insurance Journal points out, some companies spend close to 7% of the premiums they generate on advertising. In turn, they must charge more for their insurance products to subsidize these costs.
Life insurance is regulated at a State and Federal level, and the company that advertises the most isn’t necessarily the best. If you sleep better having Snoopy’s photo on your MetLife policy, or Aaron Rodgers pitching your company, then it may be worth the cost. Just know there are companies as financially strong (or stronger) offering lower rates for the same product.
Why overpay for coverage, or risk getting declined for being in less than perfect health?
At Term Life Advice, we work with over 60 “A” rated life insurers because it’s not a “one size fits all” industry. Each insurance company creates its own unique set of “underwriting guidelines” (risk categories) based on a person’s height, weight, age, health/medication history, occupation and lifestyles. By comparing rates and underwriting guidelines from dozens of highly-rated insurers, we’re able to save our clients up to 73% on the cost of their life insurance coverage.
Most people buy term life insurance as a safety net to replace their future lost income if they die prematurely. Everyone’s situation is different, but most financial advisers recommend purchasing a minimum of 10 times your income after taxes have been taken out. In other words, buy enough life insurance to replace your “take-home” pay for the next ten years. If affordable, purchase a bit more…“You can never leave too much behind…only not enough”.
While we don’t believe the “10 times” rule applies to everyone, we often receive calls from clients who ask for a policy that will only replace a year or two of their income. If you have a young family, a dependent spouse, or parents who rely on you for financial support; this is probably not enough coverage.
Most people purchase life insurance to ensure that their surviving family will be able to maintain their current lifestyle if they are no longer around. If you’re applying in your 60’s when kids are on their own and you’re nearing retirement, a few years of income replacement may be enough. In these situations, we recommend estimating the amount of money your spouse would need to reach retirement age and purchase a policy equivalent to this amount.
If you’re worried about overspending on coverage, or becoming over insured in the future, make sure you buy a policy that will allow you to decrease your coverage. Most life insurance policies will allow you to reduce the amount of coverage you carry and the cost of your policy.
Your “stay at home” spouse should also be insured.
Though they may not receive a paycheck, the responsibilities of running a household are as valuable as working for traditional pay. If your spouse was gone, your expenses would likely increase, especially if you need to hire a nanny or maid to help with childcare, transportation, housework, laundry services, grocery shopping, meal preparation, etc.
In addition, any debts that your spouse leaves behind such as; burial costs, medical bills, car notes, and credit cards become your responsibility. In most states, “non-working” spouses can be insured to match their income-earning partner, or up to $1 million.
Most life insurance companies offer “riders” or optional benefits that you can add to your life insurance policy for an additional cost. While some of these “riders” may seem like a great deal, they’re primarily available to increase profits for your insurer. Many insurance agents recommend them, but in reality, they are more beneficial to your life insurance agent’s commission then they’ll likely ever be for you and your family.
Common examples of life insurance riders include; return of premium, waiver of premium, spousal riders, child riders, double indemnity, etc. There are a few rare exceptions, but in most cases, you’ll get better coverage, pricing, and flexibility by avoiding these add-ons or purchasing separate policies.
Before I became a life insurance agent, I had a “waiver of premium” rider on my own life insurance policy. It sounded like a good deal…. If I ever became disabled, the insurance company would pay my insurance premiums through the end of 15-year term. My insurance agent highly recommended the extra protection, and the cost was only about $10 a month, so I went for it.
When I started working in the insurance industry, I learned that my insurance company’s definition of “disabled” was not exactly what I expected. In order to qualify for this benefit, I couldn’t perform ANY job, not my present job. I’d have to be so incapacitated that I couldn’t take tickets at a movie theatre. Plus, there was a six-month waiting period before the benefit would begin. These types of mistakes are very common, and they can usually be easily corrected.
Bottom line: Read AND understand what you’re buying. If you currently have a policy with riders, make sure they’ll perform as you understand and expect. If you’ve changed your mind, like I did, you can usually cancel the rider without affecting your overall policy. If you have questions about your current coverage, we’re here to help. Toll-free: 855-902-6494.
Change is inevitable, and as time goes by, our need for life insurance changes too. The life insurance policy you bought a few years back may no longer be the right fit for your current financial situation…maybe you paid down your mortgage faster than your expected, or maybe one of your children received a full scholarship for college…you could be over or underinsured.
Did you have another child you weren’t planning for? Did you purchase a second home? Or maybe your life insurance policy doesn’t have as many years left on it as you thought.
Has your lifestyle changed? Did you finally give up smoking, switch to e-cigarettes or chew? Have you changed jobs and now working for an employer who’s not providing the life insurance you once had?
Annually reviewing your life insurance policy may prevent you from overpaying for coverage, or being underinsured. In addition, your policy may provide you with time-sensitive options to extend your coverage past the length of your term. One of these strategies, called a conversion option is ideal for people whose health has deteriorated.
A conversion option is a lesser-known feature that is often included with many term life insurance policies. It’s a contractual obligation that allows the policyholder to convert their term life insurance policy into a permanent life insurance policy, without reproving their health or completing an exam. However, your policy’s conversion option usually expires at a specific age, or when your term ends, so it’s important to review your policy each year
Here’s a hypothetical example:
Assume you bought a 20-year term policy in your 30’s. Since then, you’ve had a heart attack or cancer. Rather than let your policy run out, you may want to CONVERT it into a lifetime policy. The converted policy can be at your original death benefit or lower, and the life insurance company will offer you the same rate class that you were originally approved for. Read more about term life insurance conversions.
We’re Here to Help!
Life insurance is an essential component of a lifelong financial plan. Avoid the common term life insurance mistakes that too many people make, and start planning today!
Give us a call, toll-free at: 855-902-6494, and we’ll help you determine your available options for coverage. Our licensed, friendly, and knowledgeable agents will also save time and money by comparing rates from more than 60 top-rated life insurance companies in just a few minutes. Our impartial shopping services are free, and there is no cost to apply for coverage.
You can also request a free instant online quote below to compare rates from dozens of life insurers in less than a minute.