How to avoid the 4 most common life insurance mistakes, according to a financial planner

Getting life insurance is a financial rite of passage, especially if you have a family that counts on your income. But it can be hard to understand what your policy covers, what the full benefits are and how they pay out.

Many people feel overwhelmed when it comes to life insurance. According to an October 2023 survey by insurance comparison website Insuranks, 29% of millennials say they haven't bought life insurance yet because they're put off by its complexity.

CNBC Select spoke with William Bevins, a certified financial planner with Cypress Capital, to help you avoid some of the most frequent mistakes people make with life insurance. 

• Waiting too long to get a policy
• Buying coverage without fully understanding it
• Not considering term life insurance
• Expecting life insurance to be your retirement nest egg
• Bottom line

One of the biggest errors Bevins sees people make is people delaying getting insurance.

"It's an easy item to put off or ignore," he said. "But life insurance gets more expensive as you age."

And conditions associated with aging — like heart disease, diabetes and high blood pressure — can raise your premiums or even make it harder to qualify for coverage.

It's hard to think about your mortality when you're young and relatively healthy, but that's when you should set up a plan for the future.

State Farm stands out for consistently high customer service ratings and offers several affordable term life plans. If you bundle your policy with home or auto coverage, you could also qualify for a discount.

Life insurance policies are written in legalese, so it's not unusual for people to sign up for a policy and still not understand what it does and doesn't cover. Associated fees and costs. "can sometimes be hidden in a prospectus or sales material," Bevins said. 

Fortunately, insurers are required to offer what's called a "free look period," during which you can cancel your policy for any reason and get a refund.

The length of the free look period varies by state and insurer, but it's generally between 10 and 30 days. Use that time to review all the terms and conditions, ask any follow-up questions and make certain you're getting the coverage you want and need. 

Many people who need life insurance don't get it because they think the premiums are too expensive. But term life insurance is an affordable alternative worth considering.

Your policy expires after a set period (generally between 10 and 30 years) and it doesn't build cash value. But term life is typically far cheaper than whole life insurance: A 30-year-old non-smoker will pay $26 a month on average for a $500,000 term life insurance policy that's valid for 20 years, according to Policygenius, compared to $440 a month on average for an equivalent whole life policy.

"It seems like term life insurance has never been a better value than it is today," Bevins says. 

CNBC Select's top-ranked company for term life insurance, Guardian has been in business since 1860 and has received a A+++ in financial strength from A.M. Best, the agency's highest rating. If your needs change, policyholders can convert their term life policy into a permanent life one in the first five years without added fees or a new medical exam.  

If you're looking to establish a financial legacy for your heirs, term life may not be the right choice. But if you want to ensure your children have money for college or your home is paid off, it could be a good fit.  

Some social media personalities have begun touting permanent life insurance policies — including whole life insurance and universal life insurance — as a way to build wealth while you're still alive, including for retirement.

While these policies do accumulate cash value you can tap into later, using your life insurance policy as an investment is a risky proposition.

The money can help with expenses relating to long-term care or a terminal illness, but it's highly unlikely to be enough to use as a big part of your retirement fund.  

"I just think there are other alternatives that might work better, longer term," Bevins says.  

He recommends a Roth IRA, which allows you to take tax-free withdrawals in retirement (considered age 59 1/2 by the IRS). In 2024, contributions are capped at $7,000 for those under age 50 and $8,000 for those age 50 and older.

The Charles Schwab IRA has no minimum deposit for active investing and a variety of retirement planning tools to help you get — and stay — on track.

Fidelity's variety of no-commission fee stock, ETF and options trades is a good fit for beginners. There's 24-hour customer service available online and by phone and more than 200 branches throughout the US for in-person assistance.

Many consumers stumble into avoidable life insurance pitfalls because they're confused or misinformed. Understanding when you should buy a policy, what's available and what you're signing up for is essential.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed William Bevins, a certified financial planner at Cypress Capital in Franklin, Tennessee.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every life insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of life insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best life insurance.

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