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4 common life insurance policy mistakes

Common life insurance mistakes

Life insurance can be a tool for ensuring your dependents have money to care for themselves after you die. However, policyholders often make mistakes that leave their beneficiaries without adequate protection.

Making a life insurance error can be costly. Here are four common mistakes and ways to avoid them.

1. Not telling your beneficiaries about your life insurance policy.

You may think you have a good reason for taking out a life insurance policy and not telling your beneficiaries, but keeping such a secret can have unintended consequences. If you die before you have a chance to give your beneficiaries the account information, the money may never be claimed.

In February 2013, Consumer Reports reported there's about $1 billion in unclaimed life insurance benefits in the U.S. According to the study, about 1 in 600 Americans is the unpaid beneficiary of a life policy.

"If you are going to make someone a beneficiary, you really should let them know," says Jim Armitage, an insurance agent in Arcadia, California.

Amy Bach, executive director of the California-based United Policyholders consumer group, says you shouldn't count on your insurer to make your beneficiaries aware of your policy. When you buy the coverage, she recommends immediately giving your beneficiaries the name of the insurer, account number and any other details they'll need.

Kevin Foley, a New Jersey insurance agent, says you can give your beneficiaries this information while you're alive or ask a trusted person, such as an attorney, to relay the information after you die. 

"It's important to tell somebody," he says.

2. Assuming the life insurance you get through your employer is adequate.

Many employers offer a life insurance policy to their workers, but it's a mistake to simply assume it would be sufficient to meet the needs of your dependents when you die.

For example, a $200,000 benefit might be adequate if you have no children and a spouse with his or her own source of income. However, if you have a monthly mortgage payment, children who will attend college, or a spouse who doesn't work, that benefit might not meet your family's long-term needs.

To determine how much life insurance you need, add up your debts and your household's ongoing expenses, such as mortgage payments, utilities, food, car maintenance and the cost of education. Include the cost of replacing medical insurance, if your family's coverage is through your employer. When combined with your assets, such as bank accounts, retirement savings accounts and investment portfolios, your life insurance benefit should be high enough to meet your dependents' long-term financial needs.

Life Happens, a nonprofit that offers education about life insurance issues, has a free calculator at to help you determine how much insurance protection you need.

3. Assuming you can't buy life insurance because you've been rejected.

Each insurance company has its own standards for accepting or rejecting policyholders. Just because one company has declined to issue you a policy doesn't mean another won't find you acceptable.

According to a March 2015 report from Life Happens, you may be rejected if you participate in high-risk hobbies. Each carrier decides which activities are too risky to insure.

If you have an illness, such as cancer or heart disease, some companies are more willing than others to assume the risk of having you as a policyholder, Armitage says. "They all have different guidelines."

If you've had citations for driving under the influence of alcohol (DUI) in the past decade, some insurance companies will decline you. The key is to find an insurer who doesn't find you too risky to accept as a policyholder.

4. Believing you're stuck with a high rate because of poor health.

Underwriters price your policy based on the likelihood you'll die while it's in effect. If you buy a policy while you're seriously ill, you'll likely pay a higher rate than if you were healthy. This doesn't mean you're stuck with the higher rate for the duration of the policy, however. Insurers recognize things can change.

For example, a person who decides to stop smoking often can qualify for a lower life insurance rate, Bach says.

Someone who had cancer but remains in remission for five years or more may qualify for a substantially reduced rate, Armitage notes. Generally, policies are eligible for price reviews one year after purchase, he adds.

If you qualify for a lower rate, you may be able to afford more coverage for your beneficiaries.

To shop for a cheaper policy after recovering from an illness, contact individual companies, compare policy prices online, or work through an insurance broker, who can check out a variety of insurers and bring you the best alternatives.

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