Not Shopping Around for Life Insurance
For whatever reason, people tend to not shop around for insurance anywhere near as much as they do with other things. This is especially true with life insurance as it tends to be more sold to us rather than our buying it, and therefore the sales skills involved can have us not comparing as much as we normally would when buying something.
This leads to a fair bit of price differences among insurers, although the internet has certainly served to reduce this a lot. At one time, you had to interact in person or over the phone to even get a quote, dealing one on one with an agent, where nowadays you can get online quotes and much more easily compare based upon price.
Price is often not the only consideration though, and this is true with life insurance as well, and we do need to look at other factors that may influence our decision and make one policy preferable to another.
We tend to not pay much attention to the finer details when buying something, and while this usually does not matter with entering into agreements to purchase most things, life insurance is one of those things where terms and conditions do differ, and we need to be paying attention to these things rather than just glossing over or ignoring them.
While a lot of terms and conditions are written to protect providers from events that are generally not very likely at all, or deal with issues that people generally don’t care about much one way or the other, insurance conditions are very material to the contract and need to be carefully examined. The time to learn about these conditions is not after the insured event happens and we find out that our coverage is limited or we’re not covered at all.
Deciding on an insurance company as well as a particular policy will therefore involve our looking at both the cost of the policy and what we get for our money, the quality of the coverage. Some policies may also be better suited to some people rather than others, and we need to examine this from the perspective of our own needs and how well it suits them.
In the end, as is the case with deciding on anything insurance related, the mistake is not being diligent enough. Life insurance is far from a commodity, where one policy is so similar to another that it doesn’t matter that much which we go with.
Choosing the Wrong Type of Policy
Perhaps the most basic decision that people make concerning life insurance policies is whether they wish to go with term life or whole life. Often times, this comes down to how much they can afford, with those who can afford to spend much more on life insurance very often selecting whole life because it sounds better and offers more.
Whole or permanent life insurance policies do offer more, as they are both an insurance product and an investment product, with most of the premium going toward the investment side of things. They do grow in value and can be a good way to save for the future but generally only if the investment strategy of the policy matches up with your own.
Whole life policies generally take a very conservative approach to investing and are much more like savings accounts at a bank than investments, where the returns they offer tend to be pretty minimal.
This approach might be suitable for some people, particularly those who are older and are looking to protect their wealth, but these people tend to be too old for life insurance and often don’t need it as much either, given that they have accumulated enough that they do not really need to worry about growing their assets and can instead look to try to preserve their wealth by just trying to keep up with inflation.
Most people who buy whole life policies don’t really think very much about how suitable such a plan is to their situation, in other words if they would be better off investing this extra money themselves instead of putting it into a life insurance policy that has returns that may be far too low for their purposes.
For the most part, whole life policies that only seek out minimal returns from their savings component are not very well suited at all for those who tend to buy them, people in the early to mid-stages of their careers where they have the time to invest and also generally require higher returns than this to achieve their long-term financial objectives.
While there are whole life policies that do allow for more aggressive returns, often people do not choose these and may be put off by the risks involved. This happens quite a bit even with people who may have no issues with growth funds and may be well invested in them, either on their own or through work, but they end up not realizing that there really isn’t anything special about saving with insurance and we need to devise an approach with this as well that uses similar criteria because this is really the same sort of thing.
With term life, we also need to make sure that we’re choosing an appropriate term. The real risk here is choosing one that is too short and then coming to regret this choice if our circumstances change and our cost either goes way up or leaves us uninsurable.
This risk does tend to be priced into term policies overall, and you will pay more for longer policies, but the function of insurance is to manage risk and this is one risk that we should be looking to manage well.
Not Purchasing Enough Coverage
Perhaps the biggest mistake that people make with life insurance is not properly considering how much coverage they will need. This usually results in our being underinsured, and in spite of the advice we usually get from agents to look to address this properly, many people just don’t.
You might think, for instance, that a $100,000 policy will provide for your loved ones pretty well or at least decently if you die, and it does sound like a fair bit of money, but it clearly may not be and may just end up delaying the hardship we’re looking to prevent and insure against.
If, for instance, your family needs a minimum of $50,000 to be comfortable on, this means that they will have enough money from this for just 2 years. If we reduce our needs by deciding that they can get by on just $25,000 a year by cutting way down on their discretionary spending, or even eliminating it, we’ve now got 4 years of support from this policy.
If the help will be needed for many more years than that, then this is going to result in our family spending the money far more quickly than we would want, and then be left unprotected. The unprotected portion of this can be much longer than the protected period. We then need to ask ourselves what exactly we have purchased, if it actually does achieve its objective or just delays the inevitable.
To make things worse, we tend to underestimate the effect of inflation on all this. Given that policies often extend for 20 or 30 years, we need to ask ourselves how far this $100,000 will go that far down the road, and it might not even be enough to provide for our family for a single year due to its buying power being reduced so much.
Buying more coverage does cost more, but paying more may simply be necessary. If we cannot afford proper coverage or anything close, we may end up deciding that the difference between this very limited coverage and no coverage at all isn’t significant enough to justify our buying it.
We do need to at least start out by trying to calculate how much coverage we need for the policy to do what it is intended to do, to allow for a minimal level of financial security should we die while it is in effect, and this also requires us to calculate in inflation and not just ignore it, as many people do.
If the size of the policy is large enough, we may then expect that the amount can be invested and provide returns that will help, but this is only the case when the principal amount can be counted on to last for a number of years, not just a few.
There are more things to consider and more ways that we can make mistakes with not selecting the proper coverage, but at a minimum we need to select the right type of policy at the right price with the right terms and it also needs to be sufficient or at least minimally so to do what it is designed to do.