What If You Made the Wrong Life Insurance Purchase?

Correcting Life Insurance Shopping Mistakes

A man considers changing his life insurance policy.

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Life insurance can provide necessary funds for loved ones upon your passing. In some cases, it can even be an investment tool. But what if you realize you’ve purchased a policy that doesn’t meet your needs? Fortunately, there are ways to correct your decision. 

Below, we provide the steps you can take if you’ve chosen the wrong policy as well as details on how to find a better one.

Common Life Insurance Shopping Mistakes 

Maybe you feel like you have the wrong policy but aren’t sure. To help you decide, we’ve covered five of the more common mistakes made when choosing life insurance.

Choosing the Wrong Type of Policy

There are various types of life insurance policies, which can make choosing one more difficult. For starters, you will have to decide between a term policy and a permanent one.

Term policies last for a specified period of time, often between 10 and 30 years, and are significantly less expensive than the cost of permanent coverage. They are usually a good choice if you need a life insurance policy now to protect loved ones, but expect to not need it later on.

Permanent policies are meant to last your entire life and build a cash value within the policy to offset the cost of insurance. They are best for those who want or need to provide a lump sum to their loved ones, regardless of when they pass away. 

You may have already purchased one type of policy only to discover that a different type of policy would suit your needs better. In this case, replacing the policy could be warranted. 

You may be able to convert a term policy to a permanent one without having to reapply for coverage.

Choosing the Wrong Death Benefit Amount

It can be hard to decide how much death benefit to provide to your beneficiaries. You don’t want to leave your loved ones unprotected with too little funds. On the other hand, a larger death benefit means higher premiums. Finding the right balance between the benefit and premium can be tricky. As a result, you may find yourself holding a policy with a death benefit that isn’t the right fit. 

If the death benefit is more than you can afford, you can probably reduce it with the insurer without needing to reapply for coverage. However, if you need additional coverage and haven’t purchased a guaranteed insurability rider, it’s likely that you’ll need to provide evidence of insurability to increase the death benefit amount.

Not Shopping Around

A policy may be more or less expensive and provide ancillary coverages, such as accelerated death benefits, depending on the issuing company. Choosing the first insurer that pops up in a Google search or going with a company a friend recommended may cause you to miss out on lower premiums or more comprehensive coverage. 

Price shouldn’t be the sole determining factor, as policy pricing is often related to policy features. Basing your decision on price alone could result in bare-bones coverage that doesn’t provide useful benefits.

Another mistake related to not shopping around is failing to consider the surrender period and surrender charges on a permanent policy. Surrender periods can last up to 20 years, during which time you’ll be assessed a penalty for canceling the policy that will be deducted from your cash value.

If you’re dissatisfied with your existing policy but have the coverage amount and type you need, tread carefully. If you have a permanent policy, you may be essentially “locked in” to that policy until the surrender period expires. Plus, you may have developed health problems since applying for the policy that would make new coverage more expensive, or might even make you uninsurable.

What To Do When You’ve Bought the Wrong Life Insurance

If you’re in the position of owning a life insurance policy that doesn’t suit your needs, you have options.

Check Your Free Look Period

If you recently purchased the policy, check your policy’s free-look period. Most policies have free-look periods of at least 10 days but some may last up to 30 days. During the free-look period, you can cancel the policy without incurring any penalties or fees. 

To cancel the policy within this timeframe, contact your insurer. Your insurance company is required to give you a refund of any premiums paid within 30 days.

Amend Your Current Policy

If you’re beyond the free-look period, another option is to contact your insurance company about changing it. For example, you might ask the insurer to decrease your premiums in exchange for less coverage. You may also be able to increase your coverage or add certain life insurance riders if you’re willing to go through the underwriting process again. 

If you’ve already purchased a guaranteed insurability rider, you can use that to increase your death benefit during specific intervals. Or, if your need for additional coverage is temporary, you could purchase a short-term life insurance policy or add a term rider to your existing permanent policy.

Some term policies have a conversion period, which allows you to convert your policy into a permanent one without having to prove you’re still insurable. You may be able to convert at any time during the term, or only during a defined period. Check your policy or contact the insurer to know if this is an option for you.

Find Replacement Coverage

If your current policy doesn’t have what you need and amending it is not an option, you might consider finding replacement coverage. In other words, you could apply for a new policy with the features you need while still keeping your existing policy in force—then cancel once the new policy is issued. This is usually the safest option as it avoids any gap in coverage. 

However, if you have a permanent policy that is still within the surrender period, you will have to pay a surrender charge in order to cancel the original policy. Be sure that what you gain from the new policy is worth the amount you stand to lose.

Cancel the Policy

If you’re sure you no longer need a life insurance policy, you could consider cancellation. The process involved to end the policy depends on the type of coverage. Term policies are easier to cancel than permanent policies, due to the aforementioned surrender period and charges. 

You can cancel your policy by calling your insurance company. Halting premium payments will not always cancel the policy if you have permanent insurance and, in fact, may just eat away at your cash surrender value while keeping your policy in force. Be sure to understand the type of policy you own, the fees associated with cancellation, and the benefits you stand to lose by doing so. 

Price shouldn’t be the sole determining factor, as policy pricing is often related to policy features. Basing your decision on price alone could result in bare-bones coverage that doesn’t provide useful benefits.

Sell the Policy Via a Life or Viatical Settlement

An option for some people is to sell their policy to a third party. This is called a “life settlement” or if you have a life expectancy of two years or less, a “viatical settlement.”

A life (or viatical) settlement usually pays you more than the policy’s cash surrender value but less than your policy’s death benefit. When you pass away, the purchaser of the policy receives the death benefit.

Should you opt for a life settlement, you may owe taxes on the proceeds. Money from a viatical settlement, on the other hand, is usually received tax-free.

Tax laws can be complicated regarding the sale of life insurance, and not all companies pay out equally. Be sure you’re working with a licensed life settlement or viatical company and reach out to several for the best terms.

How To Improve Life Insurance Shopping Results

Knowing why you need life insurance can help you figure out how much you need, as well as how to select the right type of policy.

Calculate Needed Coverage

Consider what financial obligations your loved ones will inherit, such as a mortgage, car loans, and other debt. You may also want to include future needs, such as college tuition for a child or retirement costs for your spouse.

Understand Your Policy Options

It’s important to understand the different types of policies before selecting. A term policy, for example, provides coverage for a limited amount of time, usually between 10 and 30 years. But because of its lower cost, most people can afford a much higher death benefit on a term policy.

Permanent policies last your entire life, as long as you continue to pay the premiums or the cash value is sufficient to cover premium costs. Should you opt for a permanent policy, you will need to decide which type of permanent policy is the best fit. Permanent policies come in several types, including whole, universal, and variable.

Use a Broker

Brokers understand different types of policies and have access to life insurance products from numerous companies. They can help you compare policy types and costs to find ones well-suited to your needs. When working with any life insurance broker or agent, be aware that they earn a commission on the sale in exchange for their expertise. 

A reputable broker will put your needs above the commission. But as you should with any insurance purchase, ensure that you’re getting the right amount of coverage for your needs and that you can afford the premiums.