From Insurance for Dummies by Jack Hungelmann

 All kinds of half-truths, myths, and common mistakes are associated with buying insurance. In this section, I show you the most common ones so that you can avoid falling into any traps.

Mistake: Trading cash value for death protection needs

Being underinsured with permanent life insurance may be the biggest single mistake that people make in buying life insurance. They get swayed by the lure of the investment portion or cash value of the policy but can’t afford to have their cake and eat it, too. In other words, they can’t afford to pay for all the death protection they need plus the investment, so they buy a cash value policy with less death protection than they need in order to have some investment — something to show for it in the end when they don’t (unlike the rest of us) die. However, when they do die, their family doesn’t have enough money to live on, creating a serious financial problem.

The most important thing about life insurance is the protection it offers. So first things first. Determine how much life insurance you need by using a credible method. Then buy as much of that protection as you can afford, using term insurance, even lower-cost reentry products if necessary. If your budget has something left over, only then is it okay to look at permanent life products for part of your coverage. Never trade critical protection for less-important investment opportunities.

Myth: Buying supplemental group life insurance is cheaper

Group insurance pools healthy and unhealthy people. Group insurance rates are, therefore, cheaper only if you’re uninsurable or if the employer pays all or part of the premium.

Before buying optional coverage at work, compare the coverage with what the open market has to offer. Chances are you will do as well or better on your own, plus you can keep the policy when you leave the job.