One of the most important financial-planning moves you can make is to purchase life insurance. Life insurance is about providing for your family after you’re gone. It’s about peace of mind and making sure your family is cared for. So many people put off buying life insurance or don’t purchase enough coverage.
Those who do buy life insurance often don’t understand how much to buy or what’s a reasonable price. The Life and Health Insurance Foundation for Education, known as LIFE, points out on its website that many myths surround life insurance. In my career as a certified financial planner, I’ve seen a number of families devastated by inadequate life insurance, and my Life Insurance Movement, which takes place today, is designed to combat the misinformation that so often prevails.
Buying life insurance is an important part of good financial planning, and you don’t want to mess that up — your family’s future could be at stake. As you purchase life insurance, avoid these ways to screw up your life insurance purchase:
- Don’t lie on your application : One of the worst things you can do is lie on your life insurance application. It may be tempting to fudge your answers to get a better rate — maybe “forget” to mention a medical condition. According to LIFE, one of the biggest lies is about tobacco use. Many people know that tobacco is bad for their health — and their life insurance rates — so they lie about their use.
Other lies involve drug use, depression, income (to qualify for higher coverage amounts) and traffic violations. A life insurance company will probably ask for documentation to back up your medical history, so you could be easily found out — and denied coverage.
A lie can be the basis for a life insurance company to deny your claim. You could be putting your family’s security at risk by lying on your life insurance application. - Don’t wait to buy until you’re older : Older is not wiser in the life insurance market. Life insurance rates are based partially on age. Let’s face it: The older you are, the closer you are to death.
Each birthday you pass triggers a higher rate. Your best strategy is to apply for insurance while you are young and healthy and qualify for the best rates.
Jeff Root, owner of online life insurance agency Root Financial, says, “One of the biggest risks of waiting to buy life insurance is assuming your health will stay the same. Tomorrow’s health is guaranteed to no one. Just because you’re healthy and can qualify for affordable life insurance today doesn’t mean you can qualify for affordable life insurance tomorrow … or even qualify for life insurance at all.” - Don’t visit your doctor right before the insurance medical exam : As tempting as it is to purchase life insurance that doesn’t require a medical exam, those policies might not offer the coverage you need at a price you can afford. Shop around to see what’s available; chances are, you will need a medical exam to get the best deal.
But it might not be in your best interest to see a doctor right before your medical exam from the insurance company. Realize this: If a problem crops up at the appointment, the life insurance company will learn about it when it reviews your medical records. No, you shouldn’t avoid your regular checkups or treatment. But scheduling an extra checkup with your doctor just before you apply for life insurance could be counterproductive.
And be wary about putting off your insurance until you lose a little weight. Too often, you have lofty goals to lose 10 or 15 pounds, only to discover that time continues to slip by and your family still isn’t protected. The best time to get life insurance, if you don’t have it, is now. You might pay higher rates initially, but it is possible to ask for a rate reclassification later. After you kick the smoking habit or lose 15 pounds to put you in a different class, you can ask your insurance company to re-evaluate your situation and lower your premiums. - Don’t purchase too little insurance : One of the biggest ways to mess up your life insurance purchase is to get too little. Don’t be one of the 50 million people who don’t have adequate life insurance. That’s a surefire way to ensure your family struggles after your death.
Rather than follow a rule of thumb like “buy eight times your salary,” look at your individual situation. Consider your debts, as well as the income that your family is likely to lose from your passing. You want coverage that will pay off all your debt as well as provide income for your family. On top of that, don’t forget about the other work-based benefits you receive. Health insurance, retirement account contributions and child care are all perks that your employer may be subsidizing — and that disappears once you are gone.
Be sure to sit down and really hash out what expenses your family is likely to pay over the next 15 to 20 years, according to the ages of your dependents and the obligations your family has. Buy enough insurance to see them through. A life insurance calculator can help you pinpoint the right amount. - Don’t plan an exotic vacation : Avoid planning vacations to exotic lands until well after your policy goes into effect. Some insurance companies want to know your travel plans. If you want to go on a whitewater adventure in South America, or a safari to a country known for its diseases, you could run into trouble. And life insurance companies are especially wary of those who plan to live for long periods of time in countries experiencing political unrest or other dangers.
Make those kinds of travel plans further down the road. You don’t want to plan exciting travel until at least two years after you have secured your life insurance policy. During the application process, your entire outlook should be to reduce your risk of danger as much as you can — without lying, of course. - Don’t have a casual smoke : Thinking of lighting up a cigarette while out hanging with friends? Think twice if you have a life insurance medical exam on the horizon. We already know that smoking increases your health risks, and smoking also increases your life insurance premiums — a lot.
Smokers, even in good health, can expect to pay two, three or sometimes four times the amount that nonsmokers pay for life insurance. I once had a client who was applying for life insurance as a nonsmoker, but the medical exam showed nicotine.
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