Buying life insurance can be complicated, and with numerous options to choose from, the universe of products is often overwhelming. Plus, you might not be aware of everything that’s available when you make a purchase.
So what do you do if you buy the wrong life insurance product? In some cases, it’s easy to fix. As we discuss below, you can potentially change an existing policy, replace it with a different one, or cancel an unneeded policy.
But be aware of the timing; it often pays to make changes as soon as possible.
Common Life Insurance Shopping Mistakes
It’s ideal to get the perfect solution on your first attempt, but sometimes that doesn’t happen. Here are some common mistakes made when buying life insurance:
- Waiting too long to get insurance
- Getting the wrong type of policy
- Getting the wrong amount of coverage
- Not getting enough guidance
Waiting Too Long To Buy
It’s critical to get life insurance as soon as you know you need it. Life insurance pricing depends on your age and your health, and both of those can become less favorable as time passes.
A lower age typically leads to lower premiums, with all other things being equal, so it may be best to lock in a rate sooner than later. There’s also the question of health. When you’re young, you likely have fewer health issues. As you grow older, you may develop health problems and any existing conditions could worsen. Plus, you (or your doctor) might discover health issues of which you were not aware.
If you wait until you develop health problems to seek a policy, you’ll likely pay a higher rate, or you might not be able to get a policy at all.
Getting the Wrong Type of Policy
Think of life insurance in two broad categories: term and permanent insurance. Term coverage is designed for temporary needs, and coverage might last for a limited time (20 to 30 years, for example). So-called “permanent” insurance can remain in force for your entire life—as long as you continue to pay sufficient premiums.
If you only need temporary coverage, it may not make sense to buy a permanent policy, as these policies tend to be much more expensive. For example, a middle-class family with young children that is primarily concerned about a parent dying might benefit from a 30-year term insurance policy. After 30 years, the need for coverage could decline. That’s because the children will presumably be self-sufficient, and the household might have sufficient assets to support a surviving parent.
On the other hand, if you need a policy that lasts for your entire life, buying term coverage could be a mistake. If you outlive the term, you might die without insurance, which could be problematic. For example, you and a business partner might use insurance as part of a succession plan. The death benefit can provide cash that allows the business to continue without interruption. But since you can’t predict when you’ll die, and your need for a succession plan won’t diminish as you age, a permanent policy can help.
Getting the Wrong Amount of Coverage
Deciding how much life insurance to buy requires making some assumptions about the future. As a result, selecting the perfect death benefit may be impossible. However, if you have significantly too much or too little coverage, it can be worth adjusting your coverage.
- Too much insurance: When somebody dies, there’s no such thing as too much insurance. But being overinsured might mean paying unnecessarily high premiums. As a result, it can be hard to fund other financial goals and enjoy life. Or you might not be able to pay the premiums and instead, let the policy lapse.
- Not enough insurance: Life insurance can provide essential funds to support loved ones, but when you don’t get enough coverage, your beneficiaries may experience financial hardship.
You might have life insurance from your job, but that coverage could end if you leave your job for any reason. Consider buying enough insurance to cover your needs without relying on employer-provided policies.
Not Getting Enough Guidance and Information
Buying life insurance can be overwhelming. It’s often a task that people just want to complete—and move on to more enjoyable things. However, the consequences of mistakes can be tragic, so it’s worth spending some time to get it right.
If you only speak with one insurance agent or one insurer, you may not know about the broad universe of strategies. As a result, you risk buying from somebody with a limited lineup of product offerings, and you might not get the optimal solution. Plus, insurance policies are complicated, so the more discussions you have, the more you learn.
The same is true for price shopping after you decide on the right type and amount of insurance. By shopping around, you improve the chances of finding a product that is the right fit for your needs, and you might even save some money.
What Can You Do When You’ve Bought the Wrong Life Insurance?
Check Your Policy’s Free Look Period
If you have an insurance policy you don’t want, you might be able to cancel the policy and get a full refund of all premiums paid. Your state may require insurers to offer a “free look” period that ranges from 10 to 30 days. During that time, you have the opportunity to cancel a policy easily, but it’s important to act fast. Contact your insurer as soon as possible to protect your rights.
Buy a Better Policy
With a better understanding of your needs and the solutions available, you can buy life insurance that better meets your needs. For example, if you’re underinsured, you can buy an additional policy to close the coverage gap or apply for a new policy that provides all the coverage you need.
When you apply for a new policy, you might face new challenges. For example, you might need to satisfy a new incontestable period, which gives the insurer an opportunity to deny claims (typically for up to two or three years). If you’re older or you have new health issues, you might need to pay higher premiums for a similar level of coverage.
Be careful if you decide to replace an existing life insurance policy with a new one. It’s crucial to verify the new policy is in force before you stop paying premiums on your old policy. Replacement sales may have additional regulations, so it’s critical to discuss your situation with your new insurer.
Salvage a Permanent Policy
If you have a permanent policy that isn’t right for you, you may have several choices available. Insurers often allow you to modify your coverage. A few strategies are below, but there may be other options available. Contact your insurance company to learn about all available solutions before making a decision.
- Convert the cash value to reduced paid-up insurance: You might be able to switch to a reduced paid-up policy if you have permanent insurance. With that option, you no longer need to make premium payments, and the insurer offers a smaller death benefit that lasts for the rest of your life. This might be an option if you’re struggling to afford premium payments but would like to keep some permanent coverage.
- Convert permanent coverage to extended term: You might be able to use the cash value from a permanent life insurance policy to fund temporary insurance coverage. With an extended term option, you can keep the same death benefit, but coverage only lasts for a limited time. The more you have in cash value, the longer your coverage lasts.
- Surrender the policy: You might be able to surrender the policy and receive any cash value in the policy. Research surrender charges first and discuss the tax consequences with a CPA before doing so.
Convert Term Insurance to Permanent
If you have a term insurance policy that you’d like to keep indefinitely, you may be able to convert your policy to permanent coverage. If it’s an option, you may not need to go through medical underwriting, which allows you to get coverage at the same health rating as when you originally bought insurance. If you plan to go this route, it may be smart to switch as soon as possible. Premiums for the permanent policy depend on your age at the time of conversion.
How To Improve Life Insurance Shopping Results
Comparing life insurance policies might not be fun, but shopping around can help you find the right product for your needs. Speaking with only one insurance agent—even if it’s somebody you know personally—might limit your options. By exploring alternatives, you can compare prices, policy features, and insurance strategies to get coverage that works well for you and your loved ones.
Get Input From Experts
Insurance companies and insurance agents earn money when you buy a product. As a result, they might have a conflict of interest. Unbiased third parties, who don’t earn money based on your purchases, might be able to provide insight on life insurance strategies. Consider speaking with a fee-only financial planner, and review recommendations with a CPA to understand how any proposals might affect your taxes.
Prepare for the Medical Exam
Once you’re ready to apply for a policy, make sure you qualify for the best pricing possible. With favorable results on your health exam, you are more likely to secure low premiums (which you benefit from for many years). Get plenty of sleep, drink water, and be mindful of chemicals and stressors before your exam. Those steps can improve your chances of getting approved at the best rates. You can get life insurance without a medical exam, but might end up paying more for coverage.
- Life insurance can be complicated, and you might find you have the wrong policy for your needs.
- Common issues include buying the wrong type of policy or getting the wrong amount of coverage.
- It may be possible to cancel a policy, but have a backup plan in place before doing so.
- Shop around and consult with experts to improve your chances of getting the right policy.