Friday, September 14, 2007

Life Insurance: The Five Most Costly Mistakes People Make

Comparing monthly life insurance premiums isn’t enough. If that’s all you look at, you can fall into a number of traps. Here are some of the biggest ones to avoid.

By Mary Pollman – SelectQuote

Buying too much life insurance
This is especially tempting for new parents and new homeowners. Your sense of risk is at an all-time high. So it’s a good time to get out pencil and paper and coolly calculate. What are your expenses? How much are they likely to increase as time goes by? Is there another earner in your family? How much of the expense can they handle without you? Come up with realistic numbers. Do it before you go shopping for life insurance.

Buying too little life insurance
This can be costly, not to you, but to your family. Classic worst-case scenario: Breadwinner dies with little or no life insurance. Nonworking parent has to get a job after years out of the work force; has to pay for child care; sell the house to reduce mortgage payments; cut corners on cars, vacations, clothing, maybe even food; trim plans for the kids’ education. It’s scary, but it happens – way too often.

Buying life insurance for too long a time
Some people think the only kind of life insurance to buy is “permanent.” But permanence costs money. The life insurance company takes extra risk – and charges you for it – because they don’t know how long you’ll live and, therefore, the total premiums you’ll pay vs. the death claim they’ll pay. Many people don’t need life insurance after their kids are through school and their assets have built up. So they don’t have a permanent need for life insurance. Again, it pays to do a little math. Calculate how long before your last child leaves college and think about whether you’re likely to need life insurance (or as much life insurance) after they graduate. (Suze Orman suggests you have life insurance until your youngest child is 24 years old.)

Buying life insurance for too short a time
The danger with not getting a policy that lasts long enough is that it can cost a lot of money to get another one. Assuming you’re in excellent health, 10-year term at 35 may cost you $280 a year for $1 million in coverage. 10-year term at 45, same million-dollar coverage, could be $600 a year – more than 100% higher.* That assumes you’re still in great health. Of course, there’s always the chance your health may change in that 10 years so that life insurance could be much higher – or can’t be bought at any price.

Buying life insurance too late

People do tend to procrastinate when it comes to life insurance. Buying too late can be very expensive. When you start to develop signs of heart trouble, for example, you may suddenly become very interested in life insurance. Unfortunately, that’s when many life insurance companies become uninterested in you. Or, they may take you on as a “special risk” at high prices. If you’re healthy, you may still find that buying too late is costly, because life insurance premiums escalate with age.

Not shopping around

You should do price shopping and “brand” shopping. Brand shopping first. After you have a ballpark idea of what kind of coverage you need, look at quality companies. See what they have that fills the bill. After you’ve narrowed it down to a list of solid options, pick the one with the best price.

Clearly, there are icebergs in these waters. And avoiding the “big five” can be hard to do on your own. What’s really too much life insurance for me? What’s too little? Do I need a policy for 15 years, to cover my mortgage? Or 30 years until I reach retirement?

My advice? Get advice. Do your own homework, but get the advice of a professional, too. Agent commissions are built into the price of a life insurance policy, so get everything you’re paying for.

About the author. Mary Pollman, CLU, has been writing about life insurance, long-term care insurance and annuities for more than 20 years. She has contributed to insurance publications, websites, consumer product literature and agent training. Mary held senior management positions in communications and marketing with two life insurance companies. She is an editorial advisor to SelectQuote.

* Banner OPTerm 10-Year: OPTerm 10 issue ages 20-80. OPTerm 15 issue ages 20-70. Opterm 20 issue ages 20-65 and 20-62 Oregon only. OPTerm 30 issue ages 20-50 and 20-45 Oregon tobacco classes only. Premium rates vary by coverage amount: $100,000-$249,999, $250,000-$999,999 or $1 million and above. Premiums quoted include $50 annual policy fee. Premiums are guaranteed to stay level for 10, 15, 20, or 30 years, respectively, and increase annually after initial guarantee period. OPTerm policies can be issued in preferred plus non-tobacco (no tobacco use in past 36 months), preferred non-tobacco (no tobacco use in the last 24 months), standard plus non-tobacco or standard non-tobacco (no tobacco use in past 12 months) and standard tobacco classes. OPTerm 10, 15 and 20 substandard policies can be issued through Table 4. OPTerm 30 substandard policies can be issued through Table 12. Coverage can be renewed to age 95. OPTerm policy form #RT-97. Forms and policy provisions vary by state. Not available in all states. Policy descriptions provided here are not a statement of contract. Rates as of 8-14-07. #07-081

Avoid the costly mistakes people make when they buy life insurance.
What do you really need in terms of coverage amount and coverage length? Which life insurance companies are best? A SelectQuote Licensed Expert can help you sort it out. We can help you avoid costly life insurance mistakes and give you free quotes from the highly rated Term Life Insurance companies we represent. Call toll-free 1-888-739-7965 . Or go to our website,

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