5 life insurance blunders to avoid

Don't be cagey

Most people would rather not talk about their life insurance, what with its intimations of mortality and the implication -- still considered tacky in some circles -- that a dollar amount can be placed on human life. But if holders don't talk about their policies with the beneficiaries, letting them know what company holds the policy, if not the amount, something worse can happen: Human life becomes worth no dollar amount at all.

Sometimes survivors simply don't know about the deceased's policies, says Steven Weisbart, the chief economist for the Insurance Information Institute. "It happens much more than it should," he says.

Corporate consolidation can also complicate matters. A policy bought 40 years ago could have been through an outfit that has since been assimilated by an insurance giant. Insurance companies, Weisbart says, like to pay out on policies as it makes for good public relations. Even so, it "becomes very hard to make a claim unless you've got good documentation," he adds. Not knowing where to begin can't help. (See "Insurance policy missing? Collect anyway.")

Don't forget, the world goes on

One of the hardest things for life insurance policyholders to realize is that they'll no longer be around when the insurance pays out. The purpose of it is to protect their immediate family or beneficiaries.

Weisbart says insufficient foresight can hurt relatives. For example: Say a policyholder's spouse receives health insurance from the policyholder's employer. In planning how much a life insurance policy pays, then, the primary caregiver should account for the spouse no longer receiving health insurance. In a slightly less dramatic example, buyers should remain aware that the cost of big expenses like college for the kids will continue to increase after the parents pass away.

Don't depend on employer insurance

When asked about life insurance, it can be easy to choose a policy provided by an employer with the premium deducted from a paycheck. But those policies can often provide a false sense of security. Among their other problems, they sometimes expire at retirement, when buying a more comprehensive policy could be more costly.

Worse, group life insurance is less tailored to an individual's health and needs. And often, the policy isn't worth enough money, Weisbart says.

"Most group life coverage (plans) are really pretty modest, one or two times salary," he says. "In relation to what (beneficiaries) need, it's not a lot of money." In the end, buying the wrong policy can leave your family shortchanged.

This article was reported by Alex Halperin for BusinessWeek.

Updated July 16, 2009

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