Importance of Avoiding Mistakes When Buying Life Insurance
Buying life insurance can feel overwhelming, but understanding the basics can help you avoid common mistakes. Start by learning the different types of life insurance policies that are available and estimating how much coverage you will need. From there, compare costs, review insurer financial ratings, and consider guidance from an experienced financial representative.
Avoiding common pitfalls - such as selecting the wrong policy type, underestimating coverage needs, overlooking insurer stability, or neglecting beneficiary designations, riders, payment options, and future expenses - can help protect your family’s finances and support more confident decisions.
1. Buying Too Little Coverage
Determining how much life insurance you need depends on a variety of factors, including:
- Family size
- Income
- Age
- Debts and ongoing expenses
- Assets
- Business ownership
- Long-term financial goals
Being underinsured can be expensive - especially if you’re the primary earner and your household depends on your income. For example, if you earn $60,000 per year, a $300,000 policy replaces about five years of income, which may not be enough for many families.
When estimating coverage, it helps to think beyond income replacement and include:
- Funeral and medical expenses
- Mortgage and loan payments
- Education costs
- Everyday living expenses
Life insurance can also help support a surviving spouse until other income sources, such as Social Security or pension benefits, begin.
2. Waiting to Buy Coverage
Life insurance is generally more affordable when you’re younger and in good health, since premiums are based partly on age and health. Purchasing coverage earlier can help lock in lower rates, while waiting often leads to higher costs over time.
In some cases, serious illnesses can also limit eligibility or reduce available options. Delaying coverage may mean paying more - or being unable to secure the policy you want at all.
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3. Ignoring Term Length
If you choose term life insurance, selecting the right term length matters. Terms usually range from 10 to 30 years, and choosing one that’s too short can lead to higher costs later, while choosing one that’s too long may mean paying for coverage you no longer need.
Shorter terms can work if major obligations are nearing an end, such as approaching retirement or having a nearly paid-off mortgage. Longer terms often make more sense for families with young children or long-term debts, like a new mortgage.
When deciding, consider factors such as how long your mortgage will last, your children’s ages, your retirement timeline, and how long your income would need to be replaced. Your personal situation should guide how long your coverage lasts.
4. Not Comparing Policies
Just like with other major purchases, comparing life insurance options can help you find the best fit. The first low-cost policy you see may not offer the most value, and shopping around can reveal similar coverage at a better price or with stronger benefits.
When reviewing quotes, make sure you’re comparing similar policies. For example, a $200,000 whole life policy isn’t the same as a $200,000 10-year term policy - whole life provides lifetime coverage, while term coverage lasts for a set period.
Before comparing quotes, decide on the policy type you want, choose a coverage amount that fits your goals, and then compare premiums for matching policies. This approach makes it easier to evaluate costs and benefits with confidence.
5. Choosing the Wrong Type of Policy
Term and permanent life insurance are built for different financial needs, with distinct features and benefits. Choosing the wrong type of policy can leave your family exposed when coverage matters most.
For example, a 10-year term policy may fall short for families with young children, since coverage could end before all dependents are financially independent. In those cases, a longer term, a convertible term policy, or permanent coverage like whole or universal life may offer better protection.
Below is a comparison of benefits for term life, whole life and universal life:
| Benefit | Term Life | Whole Life | Universal Life |
|---|---|---|---|
| Temporary Coverage for a Limited Period | ✔ | ✔* | |
| Limited Lifetime Coverage | ✔ | ✔* | |
| Option to Convert to Permanent Insurance | ✔* | ||
| Fixed Premiums | ✔ | ✔ | |
| Flexible Premiums | ✔ | ||
| Fixed Death Benefit | ✔ | ✔ | |
| Flexible Death Benefit | ✔* | ||
| Cash Value Accumulation | ✔ | ✔ | |
| Money Withdrawals/Loans | ✔ | ✔ | |
| Dividend Earning Potential | ✔* |
* Depending on the policy
6. Buying the Cheapest
When shopping for life insurance, the cheapest policy isn’t always the best choice. It’s helpful to look beyond price and consider what you’re getting, including policy features, benefits, and how long coverage lasts.
Term life insurance is usually less expensive because it covers you for a set period, while permanent options like whole life and universal life provide lifetime coverage at a higher cost. That said, the most affordable option depends on your situation - for example, term life may be a good fit if you only need coverage for the remaining years on a mortgage.
Your age, family situation, and financial goals all play a role. Choosing coverage that aligns with those needs is often more important than simply selecting the lowest premium.
7. Not Evaluating a Company’s Financial Strength
When buying life insurance, it’s important to choose a company with the financial strength to pay future death benefits. That’s why it’s important to research a life insurance company’s financial strength to evaluate their reputation in the industry before deciding whether or not to buy a policy from them.
Independent rating agencies such as AM Best, S&P Global Ratings, Fitch Ratings, and Moody’s assess insurers’ financial health. Look for ratings described as excellent, superior, or strong, which indicate an insurer’s ability to meet its obligations to policyholders.
8. Relying on Employer Coverage
Another costly mistake that people can make is assuming that their employer-provided life insurance gives them sufficient coverage. Workplace policies often offer coverage equal to one or two times your salary, which may not be enough to support long-term needs such as housing, childcare, education, and everyday living expenses.
One common guideline is to carry life insurance equal to about 10 times your annual income, though some prefer age-based estimates that factor in remaining working years. For example, Empower suggests multiplying income by 30 if you’re under 40, 20 in your 40s, 15 in your 50s, and 10 in your 60s.1
Employer coverage is generally intended as a starting point. Depending on your financial situation and family responsibilities, additional coverage may be needed to provide more complete protection for your loved ones.
9. Misjudging Beneficiary Needs
Without a realistic view of your beneficiaries’ future financial needs, it’s easy to choose too little coverage or the wrong type of policy. Taking time to evaluate these needs upfront supports more informed decisions.
Start by considering situations where income is lost, especially in households with a single earner or young children. Identify immediate and ongoing obligations such as income replacement and final expenses, then factor in everyday living costs and long-term goals.
Here are some common expenses to factor in:
| Category | Examples |
|---|---|
| Daily Living | Groceries, gas, utilities |
| Health Care | Health and dental insurance, ongoing medical care |
| Additional Support | Chronic health conditions, special needs related to disabilities or neurodiversity |
| Childcare & Education | Daycare, private school tuition, college funding |
| Housing | Mortgage or rent payments |
| Debt Obligations | Credit cards, auto loans, student loans, personal loans |
| Future Milestones | Weddings or other major life celebrations |
Building a complete picture of these needs can help you choose coverage that better supports your family’s future plans.
10. Improperly Listing Beneficiaries
Choosing and listing beneficiaries carefully is an important part of setting up a life insurance policy. The death benefit goes to the people you name, so unclear or outdated designations can cause delays or lead to unintended outcomes.
Naming a minor as a primary beneficiary can create complications and slow payment, often requiring court involvement. A common approach is to name a spouse or trusted adult as the primary beneficiary, with children listed as contingent beneficiaries. This structure can help speed payouts, reduce legal issues, and allow a responsible adult to manage funds on your family’s behalf.
11. Underestimating Health Changes
Health can change over time, which is why many people choose to buy life insurance earlier, when coverage is typically more affordable. Waiting often leads to higher premiums, as insurers factor increased health risks into pricing.
As health conditions develop, premiums may rise, policy options may narrow, or coverage may be denied altogether. Buying sooner can help lock in lower rates and preserve more choices.
12. Not Considering Riders
Life insurance riders that let you customize a policy to better fit your needs. They offer added benefits or flexibility beyond standard coverage and are typically available for a modest extra cost on term, whole, and universal life policies.
Below are some of the most commonly offered life insurance riders and what they typically provide:
| Rider | What It Does |
|---|---|
| Accelerated Death Benefit Rider | Allows you to access a portion of the death benefit while you’re still living if you meet specific qualifying conditions. |
| Critical Illness Rider | Pays a lump-sum benefit if you are diagnosed with a covered critical illness, such as cancer or a heart attack. |
| Waiver of Premium Rider | Waives premium payments if you become seriously ill or disabled and can no longer work. |
| Accidental Death Benefit Rider | Provides an additional payout to your beneficiary if death occurs as the result of a covered accident. |
| Child Term Rider | Offers life insurance coverage for your children under a single rider attached to your policy. |
| Guaranteed Insurability Rider | Allows you to purchase additional coverage at certain times without a medical exam or health questions. |
Other riders may include long-term care, term conversion, family income, guaranteed renewable, return of premium, and chronic illness options, though availability varies by insurer. Because not every rider fits every situation, reviewing your options with an experienced insurance professional can help align coverage with your goals, family needs, and health considerations.
13. Overlooking Payment Options
Some people delay buying life insurance because they assume it’s too expensive, but many policies offer more flexibility than expected. Universal life insurance, for example, allows you to adjust premium payments over time to better align with your income and budget.
With a universal life policy, you may be able to reduce payments during tighter periods, increase them later as income grows, and in some cases adjust the death benefit without buying a new policy. Talking with an insurance provider or agent about payment options can help you find coverage that fits your financial situation.
14. Failing to Understand Terms
Life insurance comes with its own terminology, which can feel overwhelming if you’re new to it. As you compare policies, take time to understand unfamiliar terms and ask questions whenever something isn’t clear.
Working with an experienced insurance professional can help. They can review your financial situation, assess your coverage needs, and explain options in plain language based on your stage of life. It’s also helpful to ask for clarification during the application process and carefully review your policy before signing.
15. Not Considering Future Expenses
It’s impossible to predict every future expense, but thinking ahead is an important part of choosing the right life insurance coverage. Overlooking future costs today can create financial strain for your loved ones later.
As you plan, it can help to consider questions such as:
- Will you help pay for children’s or grandchildren’s education?
- Could family health history affect future medical costs?
- Will someone rely on your financial support after you’re gone?
- When do you expect to pay off your mortgage?
- Do you own a business that would need protection if something happened to you?
- What standard of living do you want to maintain in retirement?
- Will travel be part of your long-term plans?
Taking time to estimate these future expenses can help you choose coverage that better supports your family’s long-term financial security.
16. Providing Incorrect Information
Providing incorrect information on a life insurance application can lead to serious consequences. You should understand what you’re applying for and give complete, honest details. Intentionally providing false information is considered insurance fraud.
If you misrepresent - or leave out - details about your health, lifestyle, or income, your application could be denied. In some cases, the death benefit may also be denied, leaving your beneficiaries without coverage. Insurers review medical records and supporting documentation, so inconsistencies are often easy to uncover.
Common examples of incorrect information include:
- Misstating your age or weight
- Hiding tobacco use
- Failing to disclose high-risk hobbies
Bottom line: Always be truthful on your life insurance application to avoid delays, denials, or issues with future claims.
Conclusion
Knowing about these 16 common mistakes can help you avoid certain pitfalls during your search for the best life insurance policy. When in doubt, remember to ask for help. Consulting with an experience financial professional or life insurance agent can offer you support in sorting through your life insurance options so you end up with a policy that meets your future financial needs and goals, at a price you can afford.
Select the right life insurance by learning from common pitfalls. Request a Free Life Insurance Quote
Sources
- Retirement savings goals 2025: 20-somethings have double the recommended balance. https://www.empower.com/the-currency/money/retirement-savings-goals-benchmarks-news.
