7 mistakes in buying life insurance
By Teri Cettina • Bankrate.com

When most money-conscious consumers think about buying life insurance these days, they immediately think "term insurance."

This form of life insurance, which covers you for a specific amount of time, such as 10, 20 or 30 years, is almost always cheaper than "whole-life" or permanent insurance. The reason: Term insurance only pays out if you die, while permanent insurance can also include an investment or savings account component. Term insurance can also be fairly simple to buy and is easy to shop for on the Web.

However, as with every important purchase, it's crucial that you understand just what you're buying when you shop for term life insurance. Even an inexpensive policy, if not designed to meet your particular financial needs, still can be money down the drain.

The following are the seven most common mistakes insurance agents say consumers make when buying term life insurance.

1. Choosing term insurance solely because it's cheap. Shopping for life insurance only by looking at its price tag is "like buying a Volkswagen Bug because it's on sale when you really need a vehicle that can haul a boat," says Mike Gerkman of Gerkman Insurance & Financial Services in Wilsonville, Ore. While the premium price (your monthly or annual cost) is certainly a factor, ensuring that your insurance matches your financial goals is more important, he says.

2. Not understanding that term insurance is temporary. That's why it's called "term" insurance -- because you buy it for a set period of time, say, 20 years. Examples of temporary needs, for which term is a great product, include insuring yourself while a business buy-sell agreement is completed for, say, a five-year period; insuring yourself and your spouse until your children can care for themselves (20 years, starting at their birth); or insuring yourself until your mortgage is paid off (15 or 30 years) so your spouse is not burdened with house payments if you die prematurely.

"Term insurance has become the more popular product, but there are still situations in which whole-life insurance policies are more appropriate," advises J. Derieck Hodges, C.I.C., Ch.F.C., of Albrecht-Hodges Inc., in Cape Girardeau, Mo. "If, for instance, you have a disabled child, you may need to insure yourself and your spouse throughout your entire life, so there will be money available for the child's care after you die."

In that example, a 20-year level-term insurance policy you bought when you were 30 would expire when you're only 50. At that point, you still would want to carry insurance, says Hodges, but your age and health conditions might make it impossible or very expensive to do so. In that case, permanent insurance might have been a better choice, he says.

3. Buying from a less-than-stable insurance company. "There are so many good insurance companies out there with reasonable rates that I can't think of a single reason to buy from a company that doesn't have at least an A rating," says Hodges. The industry's top-rated companies carry even higher ratings, such as A++. Ratings for insurance companies are usually listed along with their online quotes, or can be found online at A.M.Best.

You can also check a company's financial standing through Standard & Poor's and Moody's ratings. "An insurance company should be very quick and willing to share their ratings with you, as well as information about who owns them," says Sam Bennett, C.I.C., a partner in the Columbia, Mo., Harrison Agency Inc. "If they aren't, walk away."

4. Buying insurance coverage based on a set formula. You may have heard that a good rule of thumb is to buy life insurance coverage equal to 10 times your annual salary or 10 times your beneficiary's annual financial need. The idea is that if your surviving beneficiary invests the life insurance proceeds in the stock market (getting an average 10 percent annual return), they'll have a steady income stream and never need to tap the investment principal.

While this formula isn't a bad place to start, Hodges is a bit leery of "cookie cutter" financial analysis. "A good agent can quickly do a solid needs-assessment for you, looking at your expected timeline and your financial needs to come up with a reasonable amount of insurance," he says. "Everyone's needs are a little different, and you don't want to buy too much or too little insurance."

5. Insuring a young child. The goal of life insurance is to insure someone who has dependents who would suffer or have financial needs that wouldn't be met if that person died. Most children do not have anyone depending on their income. As a result, insurance on a child is not a good idea.

Some parents think they should have insurance to cover burial costs if a child dies prematurely. However, most agents suggest you instead invest in a good stock mutual fund. That way, you can use the investment proceeds for positive needs such as college funding, rather than just for death costs.

6. Buying insurance from a pushy agent. Life is too short; you might as well do business with people you like and trust. "If an agent starts pushing products at you without first asking detailed questions about your financial picture, that's a huge red flag," warns Gerkman. "Would you let your doctor give you a prescription before even asking you how you are feeling?"

As always, the best way to find a good insurance professional is through referrals from friends or co-workers who are satisfied with their agents. Arrange face-to-face meetings with two or three agents and pick a professional who listens well, explains products thoroughly, doesn't appear to be "pushing" a particular product or company and with whom you have a good rapport. Remember: This may be the person who helps your family with your claim if you die.

You can also shop for term-life insurance polices online.

7. Failing to regularly review your policy. You got a divorce, but your former spouse is still your life insurance beneficiary? The horror! Did you buy term insurance to cover you while you pay off your mortgage? If you refinanced during the latest rate drop and restarted the clock on your loan, you might also need to update your insurance term. Life definitely has a way of throwing changes your way. Just make sure your life insurance changes along with you.

Teri Cettina is a freelance writer based in Oregon.

-- Posted: July 28, 2004