Since most people have only the most superficial understanding about life insurance, there may be misconceptions about applying for it too. Five of the more common misconceptions include:
1. Thinking Whole Life Insurance is a good investment
Many people choose whole life insurance over term insurance because of the investment provision. But that may be largely an illusion. As a rule, life insurance is a poor investment. Not only are the returns lower than what you can get by investing in a no load index fund, but the insurance company also charges hefty commissions for managing the investment portion of your policy.
Worse, the commissions are extremely high in the first 2 to 3 years of the policy. Should you cancel your policy during that time, you may be shocked to find that you have little or no cash value built up in the policy. That will be an expensive lesson learned, considering that whole life insurance premiums are several times higher than what they are for term policies.
2. Assuming approval is automatic
To some degree or another, many of us have been convinced by credit card offers that applications are just a formality, and that approval is virtually automatic. But that is never the case when it comes to insurance of any type (group insurance is of course the exception).
Whenever you fill out an insurance application, the insurance company will automatically verify any available information about you, including prior medical history, driving history and even criminal records. Depending upon what they find, your application could either result in a higher premium, or to be denied entirely.
When filling out an insurance application, be as truthful as possible, with the knowledge that everything you include in the application will be verified and evaluated.
3. I don’t have to worry about my health – I’ll get a no medical exam policy
If you have ever seen advertisements for life insurance that advertise “no medical exam required”, you may mistakenly believe that your health doesn’t matter in the application process. In truth, the state of your health is always a factor.
The no medical exam policies often contain limits. For example, there may be a reduced benefit in the event of your death in the first two years of the policy. And since life insurance policies contain a two year period of contestability, during which an insurance company can’t challenge the payout of the benefit in the event of early death, beneficiaries may never get the full face amount anyway.
In addition, no medical exam type policies tend to be more expensive than other policies, and usually involve relatively small death benefits.
4. You’ll get a better deal going direct than working with an agent or broker
Many people mistakenly believe that they can get a better price on life insurance if they buy direct from the life insurance company, rather than going through an agent or broker. But this is a complete myth.
For the most part, it is thought that it will cost more to buy life insurance through a broker or agent because a commission will be paid for their involvement. In truth, it will cost no more to get a life insurance policy with an agent or broker. The life insurance company will pay a portion of the premium to the broker or agent for bringing your business to them, but it will cost you nothing extra as a result.
Insurance companies offer “discounts” to agents and brokers, in much the same way that hotels, car rental companies, and airlines offer discounts to travel agents. For example, the insurance company may offer a 15% discount on a life insurance policy for a customer provided by the agent or broker. The customer will be charged 100% of the premium – just as they would if they bought direct from the company. The company will pass the 15% discount on to the agent. The customer will pay the same amount, whether they go through an agent, or they go direct.
Ironically, you may end up paying more as a result of going direct. Insurance agents and brokers know where to get the best deals on life insurance, and will often get you a lower premium than you can get on your own.
5. Thinking that “later” is better than now to buy life insurance
Let’s admit that buying life insurance is not one of the more pleasant activities you can engage in. You’re looking to buy a benefit that will only apply in the event of your own death. That seems like an endeavor that most people would delay for as long as they can. But when it comes to buying life insurance, later is never better.
The key to buying life insurance is to do it while you are young, and in good health. “Young” is of course a relative term – but it is the fact that you will be older in one or two years than you are right now. That means that a delay will result in a more expensive annual premium for the same amount of coverage.
The same is true in regard to your health. The onset of a health condition, such as high cholesterol or high blood pressure, could require that you will have to pay higher premiums than what would have been the case before the condition developed.
If you are feeling good today, then today is the time to apply for life insurance. Tomorrow, it will cost more – and it may even be too late to get it all.
