Seven Common Life Insurance Mistakes (and Ways to Solve Them)

1. Waiting. The best life insurance price you will ever get is the one you will receive right now. The longer you wait, the more you will pay, because life insurance prices are pegged to your age and health. The thinking is that younger people live longer, so they will make more payments with less risk of a benefit payout. Solution: Act now.

2. Missing the tax break. Life insurance premiums can be paid with pre-tax dollars. If you are self-employed or work for a company that offers a Section 125 plan or Flexible Spending Account (FSA), you can use pre-tax dollars to pay for life insurance. This will increase your buying power an average of 34%, since you will be paying with dollars that have not had federal income tax (20%), Social Security tax (7.65%), or state income tax (6.5%) withheld from them. Solution: Check to see if you qualify.

3. Not making a person your beneficiary. If you make your estate, rather than a person, the beneficiary of your policy, then the death benefit will be reduced by inheritance taxes. If you make a person the beneficiary, he or she will receive the benefit tax-free. Naming your estate as the beneficiary also means the death benefit will be tied up in probate court. An individual will receive the death benefit quickly, enabling him or her to meet immediate expenses without borrowing. Solution: Name a person as your beneficiary.

4. Not naming back-up beneficiaries. If your beneficiary dies before you do, even by a few minutes, then the death benefit will be paid to your estate—unless you name a back-up beneficiary. Unlike your estate, the back-up beneficiary will receive the death benefit tax-free and without having to go to court. Solution: Designate back-up beneficiaries.

5. Not updating the policy. Life insurance policies last a long time, and many things can change while they are in effect. Marriage, divorce, having children, losing a parent—all of these can affect your choice of beneficiaries and back-ups. Solution: Revisit your policy regularly. Set an annual date as a reminder. Use your birthday, April 15 (tax day), Thanksgiving, or any other day that seems appropriate.

6. Not getting enough coverage. Life insurance is forward-looking; you have to forecast how much money will be needed in 20, 30, 40 years or more. If you forecast in today’s dollars, the benefit will likely be smaller than is necessary to leave the kind of legacy you want. Solution: Buy a little more coverage than you think your beneficiary(s) will need.

7. Outliving the policy’s term. It isn’t the outliving that’s bad, of course; it’s having the coverage come to an end. This only happens with term life insurance, because it covers you for set number of years—10, 20, or 30. When the term ends, the coverage ends. This is not the case with whole life insurance. As the name suggests, whole life covers your whole life. It is more expensive than term life, however, so some people opt for term life until they can afford a whole life policy. Solution: Discuss your options with your family and insurance agent.