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6 major life insurance mistakes

Do you have the coverage you need? With help from the personal-finance blogosphere, Jeff Rose explains the vital role life insurance plays in financially protecting families.

By MSN Money Partner Aug 22, 2012 10:21AM

This guest post comes from Jeff Rose at Good Financial Cents. 

 

Image: Insurance © NULL/CorbisOne 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. In fact, J.D. Power and Associates points out that 40% of American adults have no life insurance at all, and that 50 million people lack adequate life insurance.

 

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.

 

More Americans need to be aware of the importance of life insurance, and I want to educate them about the vital role life insurance plays in financially protecting families. More than 75 bloggers are taking part in the Life Insurance Movement. A list of participants can be found on Insure.com.

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 six ways to screw up your life insurance purchase:

 

1. 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. (Post continues below.)

2. 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."

 

3. 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.

 

4. 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.

 

5. 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.

 

6. 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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The cause? A few days prior while enjoying a night on the town, the client had shared a smoke with some friends. That one smoke proved to be costly. 

 

In the end, your life insurance policy is what stands between your family and financial ruin, should something happen to you. Get educated about life insurance, and purchase a policy as soon as you can.

 

More on Good Financial Cents and MSN Money:

 

 

5Comments
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Glad to be taking part of the Life Insurance Movement, thanks Jeff. I don't know if it's fear of death or just procrastination, but there are far too many families without this cheap protection. Just give up your McDonal's trip once a week (not to mention the health benefit) and get yourself $500,000 worth of good, term life insurance. your family will thank you.
Apr 8, 2013 4:27PM
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6 major life insurance mistakes- MSN Money : Try this site where you can comapre quotes from different companies:  usainsurancequotes.net
Nov 6, 2012 6:51PM
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According to recent surveys, perhaps the main obstacle to people owning life insurance is that they think life insurance is way more expensive than it actually is. 

The obvious remedy to this situation of people thinking they can't get life insurance because of cost is to go take a look at actual rates.

Many online companies offer rate comparisons from major insurers. The QualityTermLife website offers an easy to use quotes feature (http://www.qualitytermlife.com). Recommended because they don't ask for name, phone, or email before you can see the quotes.
Apr 8, 2014 12:04AM
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Yeah term is just too cheap not to get.  I am a mother of 3, and a wife of a loving father.  If something happened to either me or my husband it would devastate the family, emotionally and financially.  At least the financial part can be controlled.  I mean I pay like $18 bucks a month for a LifeAnt policy which really isnt tough to swing.  Well technically my husband pays for it because I'm working hard at home and he works.  The biggest advice ill give here, we almost listened to a financial advisor who tried to sell us whole life for like $300 a month.  Good thing my father in law stopped us for sure.
Feb 19, 2014 2:40AM
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Term life insurance is the only way to go.
Insurance as an investment is a joke. The only who benefits is the agent who gets the commission.
If you are looking for cheap rates, you might wanna give LifeAnt a try. My husband found a 30 year term policy there for an unbelievable rate... like less than 30/month for 2 million policy. Definitely worth a look.
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