4 Common Mistakes People Make When Buying Life Insurance (and How To Avoid Them)

1. Procrastinating. The biggest mistake people make when buying life insurance is delaying the purchase. The simple logic of the actuarial table is this: The younger you are, the less life insurance costs. The older you are, the more you pay. The death benefit doesn’t change. Only the cost does. A $1 million policy will pay that amount to your beneficiaries whether you buy it at 25, 45, or 65. The difference is the monthly premium you pay.  Buy at 25, and you will pay a fraction of what you will at 45. Buy at 45, and you still will pay far less than you will at 65.

Solution: Buy now. It’s the best rate you will ever get. Make “buying insurance” an action item on your to-do list or in your personal organizer. When it comes up, don’t question if or why. Make the appointment with your life insurance agent.

2. Paying as an individual. Many people take out a life insurance policy without bothering to check to see if their employers offer insurance. Big mistake. You usually can stretch your dollar much further by increasing the coverage provided by a company’s group plan—if allowed—than by buying insurance yourself. If you are self-employed are part of a closely held business, you can use pre-tax dollars to pay for life insurance rather than after-tax, personal income.

Solution: Check to see if your employer offers life insurance. If you are owner or part owner in a business, see if the company offers a cost-effective way to provide insurance.

3. Naming your estate as your beneficiary. Some people are not sure who to name as a beneficiary, so they name their estate. This error automatically ties up the death benefit in probate court. It also will subject the death benefit to inheritance taxes or higher tax rates than if a beneficiary is named.

Solution: Name a beneficiary. While you’re at it, name back-up beneficiaries. If your named beneficiary dies before you or with you, the death benefit will go to your estate—with all of the tax problems discussed above.

4. Not buying enough coverage. It is easy to underestimate how much insurance to buy, especially if you buy young—before you have a family, a mortgage to pay off, or a large salary that will be missed when you are gone. You can always add coverage later, but the premium will go up (see mistake #1).

Solution: Opt for a higher amount than you initially consider. Chances are you won’t review your policy for some time. When you do, you might be disappointed to see how little insurance you bought when you were young, foolish, and insurance was cheap.