The life insurance mistakes families discover only when it is too late to fix them

The costly mistakes are rarely about the premium

The biggest life insurance mistakes are relying entirely on coverage through work, leaving beneficiary designations untouched after a marriage, divorce or birth, buying a round number instead of an amount tied to real needs, giving inaccurate answers on the application, letting a policy lapse or replacing it carelessly, and never telling the family the policy exists. Almost all of them can be fixed in an afternoon while you are alive and healthy. Very few can be fixed after a claim.

I am a New York Life agent in Frisco, and when I review coverage for a new client I often find at least one of these. None of them come from carelessness so much as from life moving faster than paperwork. This guide is general information. For questions about wills, trusts, divorce decrees or taxes, talk to a licensed attorney or tax professional, since New York Life and its agents do not provide tax, legal or accounting advice.

Treating the policy at work as the whole plan

Group life insurance through an employer is convenient and often a good foundation. The problem is relying on it alone. The Texas Department of Insurance notes that a basic group policy usually pays one or two times your annual salary, that some plans cap coverage, and that employer coverage typically ends when you leave your job.

For a household with a mortgage, children and maybe a parent to help, one or two years of salary rarely covers what the family would need. For a sales professional whose pay is mostly commission, coverage based on salary may leave a large share of real income unprotected. And in a career where job changes are common, coverage tied to the job can disappear at the very moment health makes new coverage harder to get.

Keep the group coverage; it is usually inexpensive and worth having. Just treat it as one layer, find out whether it can be converted or continued if you leave, and build the rest of the plan on coverage you own yourself.

Beneficiary designations nobody has looked at in years

A beneficiary designation is one of the most powerful pieces of paper you own, and one of the most neglected. Life insurance generally pays the people named on the policy, not the people named in your will. I regularly see policies still naming a parent from before a marriage, a former spouse years after a divorce or a beneficiary who has since died.

TDI explains that if you do not name a beneficiary, or your beneficiary has died, the company pays the death benefit to your estate. That can mean delay and cost before the money reaches your family. If you are going through a divorce, coverage and beneficiaries are often part of the settlement, and a family law attorney's guide on dividing a business in a Texas divorce is a reminder of how much gets decided in that process. Make sure your designations match whatever the final decree requires.

Young children add another layer. Minors generally cannot manage an insurance payout on their own, so naming them directly can create complications. An estate planning attorney can explain options such as a trust, and the guide on what happens to a Texas family without a will shows why that conversation matters.

• Name a primary and a contingent beneficiary on every policy.
• Use full legal names, and check percentages add up to 100.
• Review designations after every marriage, divorce, birth, adoption or death in the family.
• Ask an attorney how to handle beneficiaries who are minors or who have special needs.

Buying a number instead of a need

Many people choose a coverage amount because it sounds substantial or because it is what a friend bought. TDI recommends deciding the amount by considering your debts and the income your family would need to replace, and I add the number of years each need will last. A round number picked out of the air is almost always either too much, which strains the budget, or too little, which leaves the family short.

The same goes for the type of policy. Buying permanent coverage you cannot afford to keep, or term coverage that ends years before your largest obligation does, are both common. My guide comparing term and whole life for young families explains how to match each type to the length of the need.

Small application errors with big consequences

It is tempting to round off answers on a health questionnaire or leave out a condition that seems minor. TDI explains that during a policy's two-year contestable period, the insurer may review your application and deny payment if information was wrong or undisclosed, even if it is unrelated to the cause of death. A small omission can put an entire claim at risk.

The fix is simple: answer completely and accurately, ask your agent about any question you are unsure of, and keep a copy of what you submitted. If your health changes before the policy is delivered, say so before you sign.

If you suspect one of these mistakes is sitting in your own files, it is worth having someone review the policies with you now, while every one of them can still be corrected.

Letting a policy lapse, or replacing it without a plan

Policies lapse more often from a changed bank account or a missed notice than from a decision to cancel. TDI notes that most policies have a 31-day grace period after a premium's due date, and that a lapsed policy can usually be reinstated within five years by paying back premiums plus interest, possibly with new health questions or an exam. Reinstatement is not guaranteed, and the process is far harder than simply keeping payments current. Automatic payments and an up-to-date mailing address prevent most of these problems.

Replacement is the opposite mistake: dropping a policy you already have for a new one that looks better on the surface. TDI warns that replacing a policy restarts the two-year contestable period and may trigger surrender fees, and that it is illegal for an agent to replace a policy just to earn a new commission. Before you replace anything, compare the two side by side in writing, and never cancel the old policy until the new one is approved, delivered and paid for.

Forgetting the fine print on loans and conversions

Permanent policies with cash value often allow loans, which can be useful. TDI cautions that if a policy loan is not paid back, it lowers the death benefit. Families are sometimes surprised to learn that the payout is smaller than the face amount because of a loan taken years earlier.

Term policies carry a different deadline. Many are convertible to permanent coverage without a medical exam, but TDI notes conversion usually must happen by around age 65, and individual policies may set earlier limits. Missing that window can mean losing the ability to keep coverage if your health has changed. Note the date somewhere you will see it.

Protecting against death but not against illness

Life insurance answers one question: what happens to the family if I die? It does not answer the question that working households are often more exposed to, which is what happens if I live but cannot work. A long illness or injury can stop a paycheck for months or years while the mortgage, childcare and every other bill keep coming, and the life policy pays nothing because no one has died.

Many families carefully insure the death risk and leave the disability risk to whatever their employer happens to provide, without ever reading the benefit formula. If your household depends on your income, look at both risks together. The questions that matter most, such as how the policy defines disability and how long it waits before paying, are different from the ones you ask about life coverage, and they deserve the same attention. My guide on whether you need disability insurance and what the policy should include walks through them in plain language.

A policy your family cannot find

A policy only works if someone files the claim. TDI states plainly that it has no way of knowing whether a person had life insurance. It points families to the NAIC's Life Insurance Policy Locator Service to search for missing policies, and to the Texas Unclaimed Property website for benefits that were turned over to the state after three years. Those tools exist because policies go unclaimed.

Keep a simple one-page summary of every policy: the company, the policy number, the amount, the beneficiaries and your agent's contact information. Put it with your will and tell the people who need to know where it is. Update the summary whenever you add, change or cancel a policy, so it never describes coverage you no longer have.

Fixing these takes an afternoon

Gather every policy you own, your most recent benefits summary from work and any beneficiary confirmations. Check each against the list in this guide. If something is outdated or missing, most fixes take a form or a phone call. My yearly review checklist turns this into a short routine you can repeat every year.

I am glad to go through it with you. I work with families across Frisco, Plano and Dallas, and I can coordinate with your attorney or CPA where a change affects your estate plan or taxes. There is no obligation to buy anything; often the most valuable outcome of a review is simply knowing your current coverage is set up correctly.

Questions people ask me