5 life insurance blunders to avoid

By BusinessWeek

Other than insurance salesmen, no one likes to talk about life insurance. After all, no one wants to be reminded about their looming death.

However, it's hard not to suspect that keeping this subject taboo is more in the interest of insurance companies than consumers. Better informed buyers are more likely to spend wisely. And like dentistry, life insurance can't be ignored forever.

Here's a look at some of the biggest mistakes people make after inhaling deeply and deciding that, as adults, they should probably pick up some life insurance.

Don't buy the wrong amount

There are rules of thumb about exactly how much life insurance one needs, with five to 10 times an annual salary being a common guideline. But these numbers should be taken for what they are: very general numbers. They don't account for an individual's requirements (see "Scared to Death of Life Insurance"). "The need that we're often talking about is an income replacement," says David Greene of financial planning firm CJM Wealth Advisers, so that survivors don't encounter financial havoc after a loved one's death.

Starting from the conventional wisdom, Greene says policyholders with a good pension might be able to get by with less than the standard amount. A more common problem is not buying enough -- this is even truer in cases where small children are involved. Greene and other experts caution that lump-sum payments that look substantial on paper often don't add up to much compared with a consistent salary spread over many years.

Don't trust just any agent -- shop around

The life insurance options available are dizzying. Charles Massimo, the president of CJM Fiscal Management, which works with wealthy clients in Garden City, N.Y., advises against limiting yourself to insurance advisers who are "captive" to one company.

This is doubly true for people worried about their health. Insurers calculate risk factors independently of each other, so they won't all give health conditions such as heart disease the same consideration in evaluating an application. "Some (companies) are more aggressive with different risk factors," Greene says. A good place to compare offers from different insurers is Insure.com.

Weighing your options doesn't end with the purchase of a policy. "The standard is, people buy insurance and they put the deposit in the safe-deposit box and never look at it again," Greene says. That's a mistake. The fact is people's circumstances change, and so do the offerings from insurance companies. The policy that best fit your circumstances five years ago might not always be the right choice.

Continued: Don’t be cagey

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