These Are the Biggest Life Insurance Mistakes, According to Dave Ramsey

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Most people need life insurance but can't afford to make these common errors when buying it.

Key points

  • Buying life insurance is crucial for protecting loved ones in case of an untimely death.
  • Dave Ramsey has explained the five big mistakes to avoid when getting covered.
  • His recommendations include buying the right amount of coverage at the right time and regularly reviewing the policy details.

Life insurance is a complicated but important kind of insurance coverage. Unlike many types of protection people buy, this kind of insurance pays out only after the covered policyholder passes away. As a result, it's essential to get the right life insurance coverage and avoid costly errors since correcting them could be impossible by the time a problem is discovered after death.

Fortunately, finance expert Dave Ramsey has provided some tips on big mistakes to avoid when buying life insurance.

In particular, here are five errors consumers should steer clear of if they are buying a term life insurance plan -- which is a plan that remains in effect for a limited period of time, and that pays out a death benefit only if the policyholder passes away during the coverage term.

1. Buying too little coverage

Ramsey has listed the purchase of too little protection as the No. 1 mistake when buying term life coverage. Specifically, he recommends every consumer have a policy that's large enough to replace between 10 and 12 times their income.

Otherwise, loved ones left behind who rely on the money the policyholder is earning could find themselves unable to provide for the "important stuff," such as food, shelter, and other expenses.

2. Delaying the purchase of an insurance policy

Waiting too long to buy coverage is also listed as a top mistake to avoid. As Ramsey warns, a delay in buying life insurance could make it impossible to put protection in place at all if something unexpected happens. Buying a policy also becomes costlier for those who wait, as premiums tend to be lowest if life insurance is purchased when young and healthy.

3. Choosing too short of a coverage term

While Ramsey acknowledges that policies with shorter coverage terms are cheaper, his blog warns that a policy with too short of a period of coverage could end up being costly in the end. If the coverage ends while protection is still needed for loved ones, then it may be difficult, more expensive, or even impossible to renew the policy and keep life insurance in place.

Ramsey suggests making sure that the term of coverage lasts until children are living on their own.

4. Purchasing too much extra coverage

Riders add additional coverage to a term life insurance policy. While that may seem like a good thing, extra coverage is often unnecessary and, as Ramsey's blog explains, riders offer many people "very little value."

Riders could include things like critical illness coverage or waiver of premiums. While these types of added protection are "designed to push our emotional buttons," the reality is that the cost outweighs any benefits they provide in most circumstances.

5. Failing to review policies regularly

Finally, Ramsey suggests policyholders regularly review their existing insurance coverage. This can help them make sure they have the protections they need in place for their current circumstances as life changes.

Fortunately, avoiding these mistakes is easy -- especially for those made aware of them -- so people buying coverage can make sure they have the insurance they need at the right price.

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