Term life insurance is a pretty simple concept. It’s a basic type of coverage, and it contains few bells, whistles, or complications. For that reason, you might drop your guard and make a mistake. In fact, there are at least five mistakes that you can make in connection with purchasing term life insurance. You need to avoid them all.
Ignoring the fact that term life insurance is temporary
One of the most distinguishing characteristics of term life insurance is that it is temporary. In fact, that’s the whole purpose of the word term. That’s term, as in limited term.
Why is it so important to understand and embrace this reality?
No matter what kind of term life insurance you purchase, the coverage will never be permanent. At some point in the future, you’ll either need to renew the policy – at a higher premium rate – or let it expire.
This is perfectly acceptable if you expect your need for life insurance to decline after a certain point, such as upon the emancipation of your children. Another example is where you are steadily growing the size of your asset portfolio, and will have less need for life insurance as the years pass.
But if you think that your need for life insurance will be permanent, for whatever reason, you may have to reconsider the decision to go with term, and take a whole life policy instead (whole life is permanent life insurance). It can be especially important if there is a genetic history of certain diseases developing later in life in your family. Though you may be able to buy term insurance at very low rates now while you’re healthy, that situation can change when renewal time comes around.
Taking a shorter term than is necessary
One of the most basic problems surrounding the purchase of term life insurance is that it’s first and foremost an attempt to save money. Term life insurance is the least expensive type of life insurance coverage that you can purchase – all other types become progressively more expensive.
Though it is already substantially less expensive than whole life insurance, you may get carried away with saving money on a term policy. Generally speaking, the shorter the term of the policy, the less expensive the premium will be. This is because a longer term requires the premium to cover you at higher ages, and thus the likelihood of a claim is greater for the insurance company.
In your enthusiasm to save money, don’t take a five year term policy if your circumstances actually require coverage for 20 years. You have no idea what your health condition or circumstances will be in five years, so you need to make sure that you have the policy long enough to cover the period of expected need. Cutting costs here could leave you with no life insurance at all in just a few years.
Lying on the insurance application
It should go without saying that you should never lie on an insurance application of any kind. If you do, and the cause of death is traced to a health related factor that you did not disclose in the application, the insurance company could actually contest the benefit payment and ultimately refuse to make it.
The temptation to hide certain facts on a term life insurance application may be greater due to the shorter term of the policy. For example, if you take a five year term policy, you may assume that whatever negative health condition you have is unlikely to manifest itself during that time. But if it does, your policy could be declared null and void upon your death, and your beneficiaries will be left with nothing.
You’ll be far better off by making full disclosure on your application, even if it means paying a higher premium. That is the only way to guarantee that you will have the coverage your loved ones will need.
Buying inadequate coverage and using the savings for unrelated purposes
The most obvious reason that anyone buys a term life insurance policy is because it is far less expensive than whole life and other types of life insurance. It could mean the difference between being able to afford life insurance or having none of all.
But it’s important that at least some of the money you save as a result of buying term life insurance is used to pay for a larger death benefit. For example, let’s say that it will cost you $2,000 to purchase a $250,000 whole life insurance policy. You can’t afford that, so you look into term life insurance policies. The same death benefit will cost you just $300 for a term policy.
You’ll save $1,700 going with a term policy rather than whole life. What many people do is take the term policy and blend the savings into the rest of their budget. The better course of action would be to decide that the much lower premium for the term policy enables you to purchase a larger life insurance policy.
Instead of using the entire $1,700 for non-insurance purposes, you should seriously think about doubling the amount of coverage of the term policy, to say $500,000. Your premium may rise to $600 per year, but that’s still substantially less than what you would’ve paid for whole life, and it still leaves $1,400 for other purposes.
Make sure that at least some of the savings from buying term life rather than whole life is used to purchase a larger amount of coverage.
Window shopping and thinking that premium quotes are final numbers
This is another mistake that’s primarily the result of the overemphasis on saving money. When you’re out window shopping for term life insurance, the quotes you’ll receive will be all over the place. High, low, and everywhere in between. Some of those quotes won’t even be real!
Have you ever heard of the term bait and switch? It happens in every business, including life insurance. A source will quote you an artificially low rate order to draw you into doing business with them. If you’re using that artificially low rate to compare prices, it may be a complete waste of time. They may even be quoting you a price for a term life insurance policy that contains a significant number of exclusions that can leave you with no life insurance at all under certain circumstances.
Rather than looking for the lowest rate quote for a term life insurance policy, you should look to work with a reputable insurance agent who will have a much greater ability to deliver a policy that will, at least, be reasonably close to the original quote. Many insurance sources – particularly online – are lead generation services, not insurance providers. They specialize in drawing you in based on ridiculously low rates. Don’t fall for it, go with a reputable insurance agent instead.
