Myths and Mistakes Part 4

From Insurance for Dummies by Jack Hungelmann

Mistake: Buying decreasing term insurance

Decreasing term life insurance generally gives you level premiums for a period of years with the protection amount decreasing each year. This type of policy is often used with mortgage insurance so that it decreases as the mortgage decreases. At first glance, going with a decreasing policy to cover a decreasing mortgage seems to make sense. And if that’s the only life insurance need that you have, perhaps that would be a logical solution to the problem. But most people have many other life insurance needs. When some expenses are decreasing in a person’s life, others are increasing due to inflation. Don’t buy decreasing term insurance. Instead, buy the cheapest reentry level term insurance you find. The coverage won’t decrease. The cost will be significantly less than the cost of decreasing term. If you need less coverage down the road, you can always decrease your reentry level term life insurance coverage simply by exchanging it for a lesser policy.

Mistake: Being unrealistic about how much you can afford to pay for life insurance

In the 25-plus years that I’ve been an agent, I can’t tell you how many times I’ve seen young people commit more money than they can actually afford to a large cash value life insurance policy and then two or three years later have to drop it and take a large financial loss — and perhaps even be exposed to the risk of a death without insurance. I recommend term insurance for young families. It provides the most coverage for the money spent. If you want a permanent policy later with more bells and whistles, you can always convert your term policy.

Mistake: Buying before you need it

Over the years, I’ve seen many single people with expensive cash value life insurance, years before anyone in their life would suffer financially by their death. Remember that you wouldn’t buy car insurance if you didn’t own a car. Don’t buy life insurance unless someone depends on you financially.

Myth: Life insurance is cheaper when you’re young

Life insurance really is cheaper when you’re young. So are dentures, but you don’t buy them until you need them, either. This myth started because the annual cost of life insurance is cheaper per year when you’re young because your chances of dying are lower. But the total cost that you pay over the life of the policy is not cheaper! How could it be?

Suppose that you buy life insurance for $100 a year at age 25 and your friend waits until age 35 and has to pay $110 a year for the same coverage. Now you’re both 35 and you pay $10 less per year — but how about the $1,000 that you paid for the ten years that you didn’t need it? Plus interest? Don’t buy life insurance until you need it.