10 Most Common Mistakes to Avoid When Purchasing Life Insurance

Applying for and qualifying for life insurance seems to be a straightforward process, particularly when it comes to applying for group life insurance coverage such as the Federal Employees Group Life Insurance (FEGLI) program. However, individuals frequently make mistakes when it comes to purchasing and owning life insurance, whether it is an individual life insurance policy or a group life insurance policy.

The following is a list of the 10 most common mistakes made by individual when it comes to purchasing life insurance and owning a life insurance policy, and what individuals need to do to avoid or correct the mistakes:

1. Naming one’s estate as beneficiary

Naming one’s estate (via a Will) as the sole beneficiary of one’s life insurance will result in the gross death benefit proceeds being needlessly subject to the cost of probate. In the six states that have an inheritance tax that means that the death benefit proceeds will be subject to inheritance tax. Most notably, naming one’s estate as beneficiary of the life insurance death benefit proceeds will guarantee that the death benefit proceeds earmarked for family members will be subject to additional estate settlement expenses and the delay of probate.

2. Failure to name contingent beneficiaries

If the primary beneficiary dies before the insured and there is no other designated primary beneficiary, then at the death of the insured the life insurance proceeds will be paid to the insured’s estate and subject to probate, as discussed in #1. Naming a contingent beneficiary will solve this problem. This is because a contingent beneficiary automatically becomes a primary beneficiary in the event the originally named primary beneficiary predeceases the insured. A charity is an appropriate choice as a contingent beneficiary, particularly for single individuals with few or no living relatives.

3. Failure to review and update one’s life insurance coverage

Individuals have life changes such as marriage, the birth of a child, or a significant increase in income which can affect an individual’s life insurance needs. Failing to review and one’s life insurance policy can result in inadequate coverage.

4. Owning the wrong type of life insurance

Too often individuals purchase the wrong type of life insurance given their needs for life insurance coverage. For example, they have a lifelong need for life insurance coverage, and they buy a term life insurance policy instead of a permanent life insurance policy. They have a need for life insurance after they retire. If they are federal employees and eligible to keep their FEGLI life insurance in retirement, they do not realize their FEGLI Basic Insurance Amount and Option A (Standard) coverage will decrease 75 percent during their retirement.

5. Not buying enough life insurance coverage

One of the most significant mistakes individuals make when it comes to buying life insurance is not purchasing enough life insurance coverage, especially when they are young at which time premiums are more affordable. Many individuals underestimate the amount needed to support their family, pay off debts, and cover future expenses such as the cost of a college education.

6. Minor children and grandchildren are named as life insurance beneficiaries

The improper bequeathing of a deceased individual’s estate to children and grandchildren is one of the most frequent and serious estate planning errors. There is nothing in estate law statutes that states that every child must receive equally. Children have diverse needs. What if a child is a spendthrift and will likely “squander” any life insurance death benefit proceeds? What about minor children? In most states, state law will tie up life insurance proceeds and make it more expensive for minor children to outright receive their bequeathed assets including a life insurance death benefit. In this situation, it is recommended that the life insurance policyowner establish a living trust on behalf of the minor children, naming the surviving spouse as the trustee and the living trust as the recipient of the life insurance proceeds.

7. All life insurance policies (individual and group) are owned by the insured

Individuals who do not anticipate that their gross estate will exceed the federal estate tax exemption (currently $13.61 million during 2024, to rise to $13.99 million during 2025) need not be concerned as to who owns their life insurance policies. However, individuals who live in one of the 11 states or the District of Columbia with a state estate tax do have to be concerned. This is because in these states and the District of Columbia, the state estate tax exemption is much lower; for example, in Oregon the estate tax exemption is $1 million.

In addition, the federal estate tax exemption will decrease to $7 million, effective January 1, 2026, unless Congress renews the Tax Cuts and Jobs Act of 2017.  This uncertainty in the federal estate tax exemption amount starting on January 1,2026 and the relatively low state estate tax exemptions should prompt individuals who may be affected by either or both the federal or the state estate tax to consult with an estate attorney. One suggestion for avoiding or minimizing estate tax exposure is to assign ownership of life insurance policies or transferring ownership of a life insurance policy to an irrevocable life insurance trust.

8. Not realizing how group life insurance including the FEGLI program becomes progressively more expensive, especially after retirement

Federal employees need to be aware that as an employee’s salary increases so does the premium cost of the FEGLI Basic Insurance and the option B (Multiple of Salary) insurance. The three optional coverages (Options A, B and C) get more expensive as the employee gets older. If a federal employee qualifies to keep his or her FEGLI full coverage retirement, then the premium cost skyrockets once the employee retires. For example, the FEGLI Basic Insurance will increase 750 percent once the employee retires.

9. Not understanding policy exclusions and limitations

Every life insurance policy has exclusions and limitations that can affect the death benefit payout when the insured dies. Common exclusions include suicide within the first two years of the policy issue date and death resulting from illegal activities.

10. Canceling a life insurance policy without considering alternatives

If an individual needs life insurance coverage, then canceling their life insurance policy without considering any alternatives can leave the individual’s family unprotected. Canceling an existing life insurance policy with the intent to purchase a new policy later will result in higher premiums later due to the individual being older or the individual’s health deteriorates.

Before canceling a life insurance policy, an individual should thoroughly evaluate the reasons for canceling the policy

For example, if the individual is seeking lower premiums, the individual should consider adjusting the policy term or coverage amount. Consulting with a life insurance professional to discuss alternatives to the current life insurance is also recommended.