The biggest mistake is not having any life insurance in the first place. Putting that aside, here are the three “biggest mistake runners-up”:
1. Failing to Be Honest with Your Insurance Broker
Before providing a quote, an experienced life insurance broker will ask a lot of questions up front about your health, lifestyle, occupation, driving record, and even family history. You need to be honest and provide all the information. Fessing up to something important when you are doing the application (or even worse when the nurse is asking all the questions) does not serve you well. Hoping that the insurance company will not find out or thinking it is not important is a huge mistake, as it puts all your answers into question.
Only when the broker has all the information can they provide you with the best options given your situation. If they are unsure of how an insurance company will underwrite a situation, they should do an anonymous preliminary review with a number of companies to find the best one. Without all the information, insurance brokers simply cannot do their job – which does not serve you in the long term.
2. Choosing the Cheapest Insurance Coverage
If budgets are tight, then the cheapest coverage is better than nothing, but only about half our clients choose the basic cheap ten-year-term policies once they have been given options. If you choose a ten-year term, it is cheapest because you are taking all the risk that you will be healthy in ten years when you need to get a new policy, assuming you still need life insurance.
A 20-year policy or even a 30-year policy is more expensive because the insurance company is now on the hook for a much longer period of time should you have a medical issue. Ask about a layered approach or combination of two terms (e.g., a term ten and term 20). Frequently the amount of coverage you require will decrease over the first ten years as the mortgage gets paid down and the children get older.
3. Purchasing Through a Financial Institution or Mortgage Broker Where the Mortgage is Placed
There have been exposés about this on CBC Marketplace and many articles written as well. There are eleven advantages of covering your mortgage with a personal policy in a table at this link. Three really important ones are:
a. You control the policy. Some mortgage lenders require you to requalify for life insurance each time you renew the mortgage. If that is not an issue with yours, what if you can get a better rate elsewhere and you want to change mortgage providers – you will need to requalify for life insurance. Why risk this when it is usually cheaper to have your own underwritten life insurance policy?
b. Your beneficiary will be paid the full amount of the policy and can decide if it is better to pay off the mortgage. Whatever is left over is theirs to keep while the bank just pays off the mortgage.
c. Life insurance in mortgages usually has a price increase every five years while you can lock your own policy in for as many years as you want up to 30 years or beyond.
As I said at the beginning, the biggest mistake is waiting too long. Once you have a medical issue or are being tested for one, it is very difficult and expensive to obtain life insurance – so do it now!
