Life Insurance Pitfalls: 10 Common Mistakes to Avoid When Protecting Your Loved Ones

What are the common mistakes people make when applying for life insurance? Learn more about the common pitfalls and mistakes to avoid here!

22 Minute read

Originally published: April 11, 2023

Life Insurance Pitfalls in Canada

What are the common mistakes people make when applying for life insurance? Learn more about the common pitfalls and mistakes to avoid here!

22 Minute read
Originally published: April 11, 2023

Life Insurance Pitfalls in Canada

Life insurance is a crucial financial tool that provides your loved ones with financial protection in the event of your untimely death. However, many people make mistakes when buying life insurance, leaving their families at risk or paying unnecessarily high premiums. In this comprehensive guide, we will discuss the top 10 common mistakes to avoid when purchasing life insurance and answer some frequently asked questions to help you make informed decisions and secure the future of those who matter most.

Case Study: Aisha and Carlos’s Life Insurance Journey

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  1. Aisha and Carlos, a married couple in their early 30s, decided it was time to purchase life insurance policies to provide financial protection for their young family. They had two children, ages four and six, and a mortgage on their first home.
  2. To start their journey, Aisha and Carlos sought advice from a trusted insurance broker, who helped them assess their individual needs and identify potential pitfalls. They discussed the importance of purchasing adequate coverage, taking into account their mortgage, living expenses, childcare costs, and future educational expenses for their children.
  3. Aisha and Carlos were initially tempted to rely solely on the group life insurance policies provided by their respective employers. However, after discussing the limitations of these policies, they decided to purchase individual term life insurance policies to supplement their employer-provided coverage.
  4. Their broker emphasized the importance of comparing quotes from multiple insurance providers. Aisha and Carlos were surprised to find significant differences in premium costs and policy terms between providers. By comparing quotes, they were able to secure policies that fit their budget and provided the necessary coverage.
  5. Aisha and Carlos also learned about the importance of regularly reviewing and updating their policies. As their children grew older and their financial situation changed, they needed to reevaluate their coverage to ensure it remained adequate. They scheduled periodic policy reviews with their broker, who helped them make any necessary adjustments.
  6. Finally, Aisha and Carlos were diligent in providing accurate health and lifestyle information when applying for their policies. They understood that any misrepresentation could result in denied claims or policy cancellations, leaving their family without the financial protection they intended.
  7. By working closely with their insurance broker and avoiding common life insurance pitfalls, Aisha and Carlos successfully secured life insurance policies that provided the financial protection their family needed. They felt confident knowing that their loved ones would be taken care of in the event of an unexpected tragedy.

Before we dive into the tips to help you avoid these pitfalls, it’s essential to understand the importance of life insurance. Life insurance provides financial protection for your loved ones in the event of your death. It can help cover expenses such as funeral costs, mortgage payments, and even your children’s education. By making informed decisions when purchasing life insurance, you can ensure that your family is well-protected financially during a difficult time. Now, let’s explore the tips to help you navigate common life insurance mistakes and secure the best possible coverage for your family’s needs.

Not Buying Enough Coverage

One of the most common mistakes people make when purchasing life insurance is not buying enough coverage to meet their family’s financial needs. Underestimating the amount of coverage needed can leave your loved ones in a difficult financial situation if you were to pass away unexpectedly.

To determine the appropriate amount of coverage, consider the following factors:

  • Income Replacement: One of the primary purposes of life insurance is to replace your income, ensuring your family can maintain their current lifestyle without your earnings. A common rule of thumb is to purchase a policy that provides 7-10 times your annual income, but this can vary depending on your family’s unique needs.
  • Debts and Expenses: Be sure to factor in any outstanding debts, such as a mortgage, student loans, or credit card balances. Your life insurance policy should provide enough coverage to pay off these debts, so your loved ones are not burdened with them.
  • Future Expenses: Consider future expenses that your family may face, such as college tuition for your children or the cost of long-term care for a spouse or aging parent. Your life insurance coverage should account for these anticipated costs.
  • Inflation: Don’t forget to factor in inflation when calculating your life insurance needs. The cost of living will likely increase over time, so your coverage should be sufficient to keep up with these rising expenses.
  • Duration of Coverage: The length of time you’ll need life insurance coverage can also impact the amount of coverage required. For example, if you have young children, you may want to ensure that your coverage lasts until they are financially independent.

To avoid underinsuring yourself, work with a financial advisor or insurance agent to conduct a comprehensive needs analysis. This will help you determine the appropriate amount of life insurance coverage to protect your loved ones financially in the event of your untimely death. Remember, it’s better to have slightly more coverage than not enough, as the financial consequences of inadequate life insurance can be severe for your family.

Procrastinating on Life Insurance

Procrastinating on purchasing life insurance is a common mistake that can have significant consequences for you and your loved ones. Delaying the decision to buy life insurance can result in higher premiums, limited coverage options, and even the possibility of being denied coverage altogether. Here are some reasons why you should avoid procrastinating when it comes to life insurance:

  • Age and Premiums: As you age, life insurance premiums generally increase because the risk of death also increases. Purchasing life insurance when you’re younger and healthier can result in lower premiums, potentially saving you thousands of dollars over the life of the policy. By waiting, you’re not only risking higher premiums but also potentially jeopardizing your family’s financial security.
  • Health Factors: Your health can change rapidly, and a sudden decline in health can make it difficult or even impossible to qualify for life insurance at standard rates. If you’re currently in good health, it’s wise to lock in a policy while you’re still eligible for the best rates. Waiting until a health issue arises can result in significantly higher premiums or being denied coverage altogether.
  • Changing Needs: Life events such as marriage, having children, or purchasing a home can create new financial responsibilities. Procrastinating on life insurance can leave your loved ones vulnerable during these critical times. It’s important to evaluate your insurance needs regularly and adjust your coverage as your life evolves.
  • Policy Options: The longer you wait to purchase life insurance, the fewer policy options may be available to you. Certain types of policies, such as term life insurance, may become more expensive or less accessible as you age. By acting sooner rather than later, you’ll have more choices and flexibility in selecting the best policy for your needs.
  • Peace of Mind: Knowing that your loved ones are financially protected in the event of your death can provide invaluable peace of mind. By purchasing life insurance now, you can focus on enjoying life without the constant worry of what would happen to your family if something were to happen to you.

To avoid the pitfalls of procrastination, make life insurance a priority and act sooner rather than later. 

Choosing the Wrong Type of Policy

Selecting the wrong type of life insurance policy is a common mistake that can result in inadequate coverage or unnecessary expenses. Understanding the differences between the various types of policies and carefully assessing your specific needs can help you avoid this pitfall. Here are some key points to consider when choosing a life insurance policy:

Term vs. Permanent:

Term life insurance provides coverage for a specified period, typically ranging from 10 to 30 years. If you pass away during the term, your beneficiaries receive the death benefit. Term policies are generally more affordable than permanent policies and are well-suited for individuals with temporary financial obligations, such as a mortgage or dependents’ education costs.

Permanent life insurance, on the other hand, provides lifelong coverage and often includes a cash value component that can grow over time. Whole life and universal life insurance are common types of permanent policies. While permanent policies are more expensive than term policies, they can be a good option for individuals seeking lifetime coverage or a financial tool for estate planning or wealth accumulation.

Assessing Your Needs: To avoid choosing the wrong type of policy, you must carefully evaluate your financial needs and goals. Consider factors such as your current financial obligations, the length of time you’ll need coverage, and whether you have a desire to leave a financial legacy or accumulate wealth through your policy.

  • Consult with Professionals: Speaking with a financial advisor or insurance agent can help you navigate the complexities of life insurance and select the most appropriate policy for your needs. These professionals can provide valuable guidance and answer any questions you may have about the different types of policies and their features.
  • Periodic Reviews: Life circumstances and needs can change over time, so it’s essential to periodically review your life insurance policy and make adjustments as necessary. For example, you may initially purchase a term policy to cover your mortgage, but later decide that a permanent policy is more suitable due to changes in your financial goals or family situation.
  • Flexibility: When choosing a life insurance policy, consider the flexibility of the policy to adapt to your changing needs. Some term policies allow you to convert to a permanent policy without undergoing additional underwriting, while certain permanent policies offer flexible premium payments and adjustable death benefits. By selecting a policy with built-in flexibility, you can better accommodate your evolving financial circumstances.

Relying Solely on Employer-Provided Life Insurance

While having employer-provided life insurance is an excellent benefit, relying solely on this coverage can leave you and your loved ones vulnerable to financial risks. Here are several reasons why depending solely on employer-sponsored life insurance might not be the best approach:

  • Limited Coverage: Employer-provided life insurance typically offers a coverage amount that is a multiple of your annual salary, often between one to three times. For many individuals, this amount may not be sufficient to cover their family’s long-term financial needs, such as mortgage payments, educational expenses, or income replacement.
  • Lack of Portability: If you leave your job, whether voluntarily or due to job loss, your employer-sponsored life insurance coverage may not follow you. This could leave you without life insurance protection during the time it takes to secure new coverage or start a new job that offers similar benefits. Furthermore, if you develop health issues during this period, obtaining individual coverage might become more difficult or expensive.
  • Increasing Costs: Group life insurance rates may increase with age, sometimes substantially, making the coverage less affordable as you get older. Additionally, if your employer decides to reduce or eliminate this benefit, you could be left without adequate coverage.
  • Limited Customization: Employer-provided life insurance policies usually have limited customization options, meaning you might not be able to tailor the coverage to suit your specific needs. With an individual policy, you can choose the coverage amount, policy length, and add riders to enhance your policy, such as a waiver of premium rider or a guaranteed insurability rider.
  • Health Considerations: Healthy individuals may qualify for lower premiums on an individual life insurance policy compared to the rates offered by employer-sponsored group plans. By obtaining your own policy, you may be able to lock in lower rates based on your health and lifestyle factors.

To mitigate the risks associated with relying solely on employer-provided life insurance, consider taking the following steps:

  • Supplement Your Coverage: Purchase an individual life insurance policy to supplement your employer-sponsored coverage. This can help ensure that you have adequate coverage in place to protect your loved ones and meet your financial obligations.
  • Review Your Needs Regularly: Periodically assess your life insurance needs to determine whether your current coverage is sufficient. This can help you identify any gaps in coverage and make adjustments as necessary.
  • Consult with Professionals: Speak with a financial advisor or insurance agent to discuss your life insurance needs and explore the various options available to you. These professionals can help you determine the right mix of employer-sponsored and individual coverage to meet your unique circumstances.

In conclusion, while employer-provided life insurance is a valuable benefit, relying solely on this coverage can leave you exposed to financial risks. By supplementing your employer-sponsored policy with an individual policy and regularly reviewing your coverage needs, you can ensure that you and your loved ones are adequately protected.

Not Comparing Quotes

When shopping for life insurance, it’s crucial to compare quotes from multiple insurance providers to ensure that you’re getting the best coverage and rates. Failing to do so could lead to paying higher premiums, having less coverage than you need, or missing out on valuable policy features. Here’s why comparing quotes is so important and how to effectively do it:

  • Different Rates and Coverage: Insurance providers use various factors to determine the premiums they charge for their policies, such as your age, health, occupation, and lifestyle habits. These factors are weighed differently by each company, which can lead to significant differences in the rates they offer. By comparing quotes, you can potentially find a policy with better coverage or lower premiums that better suits your needs and budget.
  • Policy Features and Riders: Not all life insurance policies are created equal, and the features and riders offered by different insurers can vary significantly. Some companies may offer additional benefits or optional riders that can enhance your coverage or provide added flexibility. Comparing quotes allows you to assess these features and riders to find a policy that best meets your needs.
  • Financial Strength and Reputation: Comparing quotes also gives you an opportunity to research the financial strength and reputation of various insurance providers. It’s important to choose a company that has a strong financial standing and a good track record of paying claims, as this can provide you with greater peace of mind knowing your loved ones will be taken care of if the worst were to happen.
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Neglecting to Review and Update Your Policy

Life insurance is not a one-time purchase that you can forget about once you’ve signed the dotted line. As your life changes, so do your insurance needs, making it essential to periodically review and update your policy to ensure it continues to meet your current requirements. Neglecting to do so could leave your loved ones inadequately protected or result in wasted premium payments.

Here’s why it’s essential to review and update your life insurance policy and some key life events that should trigger a policy review:

  • Changing Life Circumstances: Major life events can significantly impact your life insurance needs. Some common life changes that warrant a policy review include marriage, divorce, the birth or adoption of a child, purchasing a home, taking on significant debt, or starting a business. These events may necessitate changes to your coverage amount, beneficiaries, or policy type.
  • Career and Income Changes: A promotion, job change, or substantial increase in income may require you to adjust your life insurance coverage. As your income grows, you may need more coverage to maintain your family’s standard of living in the event of your death. Conversely, if your income decreases, you may need to reevaluate your coverage to ensure you’re not over-insured and paying unnecessary premiums.
  • Health Improvements: If you’ve made significant improvements to your health, such as quitting smoking, losing weight, or managing a chronic condition, you may qualify for lower premiums. In such cases, it’s worth reviewing your policy and discussing your improved health with your insurance provider, as they may reevaluate your risk and offer you a better rate.
  • Policy Expiration or Conversion: If you have a term life insurance policy, be aware of its expiration date and the options available to you when the term ends. You may need to renew your policy, convert it to a permanent policy, or purchase a new policy altogether. Reviewing your policy ahead of its expiration date ensures you have adequate coverage in place and allows you to assess your options.
  • Changes in the Insurance Market: The life insurance market is constantly evolving, with new products, features, and pricing structures emerging regularly. Periodically reviewing your policy and comparing it to other options on the market can help you identify opportunities to save on premiums or obtain better coverage.

Not Naming Contingent Beneficiaries

One of the often-overlooked aspects of a life insurance policy is naming contingent beneficiaries. A contingent beneficiary, also known as a secondary or backup beneficiary, is the person or entity that will receive the death benefit if the primary beneficiary is unable or unwilling to accept the payout. Neglecting to name contingent beneficiaries can lead to unintended consequences, complications, and potential legal disputes among your loved ones. 

Here’s why it’s essential to name contingent beneficiaries and some tips on how to do so effectively:

  • Unforeseen Circumstances: While it’s uncomfortable to think about, there’s always the possibility that your primary beneficiary may predecease you or pass away simultaneously in a shared accident. In such cases, having a contingent beneficiary named ensures that the death benefit is distributed according to your wishes, rather than being left to the probate court to decide.
  • Beneficiary’s Inability to Accept the Payout: Your primary beneficiary may be unable or unwilling to accept the death benefit due to personal reasons, incapacity, or financial constraints. By naming a contingent beneficiary, you provide an alternative recipient to ensure your death benefit is utilized as intended.
  • Minimizing Legal Disputes: Failing to name contingent beneficiaries can result in disputes among your surviving loved ones, as they may have differing opinions on how the death benefit should be distributed. Clearly specifying both primary and contingent beneficiaries can help avoid such conflicts and ensure your intentions are honored.
  • Flexibility and Control: Naming contingent beneficiaries gives you greater control over the distribution of your death benefit, allowing you to outline a clear succession plan in case your primary beneficiary is unable to accept the payout.

Overlooking Policy Riders

Policy riders are additional provisions that can be added to a life insurance policy to customize it according to your specific needs. They offer added benefits and flexibility, often at an extra cost. Many policyholders tend to overlook riders, which may result in missed opportunities for tailoring their coverage to their unique circumstances. In this section, we’ll discuss some common policy riders and the benefits they can provide.

  • Waiver of Premium Rider: This rider waives your life insurance premium payments if you become disabled and are unable to work for a specified period. By adding a waiver of premium rider, you can ensure your policy remains in force even if you face financial difficulties due to disability.
  • Guaranteed Insurability Rider: A guaranteed insurability rider allows you to increase your life insurance coverage at specified intervals, without undergoing additional medical underwriting. This can be beneficial if your insurance needs change due to major life events, such as marriage, the birth of a child, or the purchase of a new home.
  • Accelerated Death Benefit Rider: This rider allows you to access a portion of your death benefit while you’re still alive if you’re diagnosed with a terminal illness and have a limited life expectancy. The funds can be used for medical expenses, end-of-life care, or any other purpose, providing financial relief during a difficult time.
  • Critical Illness Rider: A critical illness rider provides a lump-sum payment if you’re diagnosed with a specified critical illness, such as cancer, heart attack, or stroke. This can help cover medical expenses, lost income, and other costs associated with the illness, reducing the financial burden on you and your family.
  • Long-Term Care Rider: This rider provides financial assistance if you require long-term care services, such as nursing home care, assisted living, or home health care. By adding a long-term care rider to your life insurance policy, you can help offset the potentially high costs of long-term care, protecting your savings and assets.
  • Child Term Rider: A child term rider provides temporary life insurance coverage for your children. This rider can be cost-effective as it typically covers all of your children under one rider, and the coverage can be converted to a permanent policy when the child reaches adulthood.
  • Return of Premium Rider: This rider refunds a portion or all of your paid premiums if you outlive the term of your policy. Although this rider increases the cost of your policy, it can provide a financial benefit if you do not need to use the death benefit.

Not Disclosing Accurate Health Information

When applying for life insurance, it’s crucial to provide accurate and complete information about your health and lifestyle. Failure to do so can lead to serious consequences, such as denial of coverage, increased premiums, or even the voiding of your policy if inaccuracies are discovered. In this section, we’ll discuss the importance of disclosing accurate health information and how it affects your life insurance coverage.

  • Accurate Risk Assessment: Insurance companies use the information you provide about your health and lifestyle to determine the level of risk you pose as a policyholder. By accurately disclosing this information, insurers can offer you a policy with a premium that appropriately reflects your risk profile. Providing incomplete or inaccurate information can lead to an incorrect risk assessment, which may result in you paying more for coverage than necessary, or being denied coverage altogether.
  • Policy Approval: Insurers may request medical records, test results, or additional information to verify the accuracy of your health information. If discrepancies are found, your application could be delayed or denied. By being upfront and honest about your health, you can avoid potential roadblocks in the approval process.
  • Avoiding Policy Cancellation: If you’ve provided false or incomplete information on your life insurance application, your insurer may have grounds to cancel your policy if the truth is discovered. This can leave you and your loved ones without coverage when it’s needed most. By being transparent about your health and lifestyle, you can ensure that your policy remains in force and provides the protection you intended.
  • Claim Payout: Inaccurate health information can also impact your beneficiaries if a claim is filed. If the insurance company discovers that you misrepresented your health during the application process, they may deny or reduce the death benefit payout. To avoid putting your loved ones in a difficult financial situation, always provide accurate health information.

Ignoring Policy Exclusions

Life insurance policies often come with certain exclusions that dictate the circumstances under which a death benefit will not be paid out. Ignoring these policy exclusions can lead to unpleasant surprises for your beneficiaries when they file a claim. In this section, we’ll discuss the importance of understanding policy exclusions and how you can make informed decisions about your life insurance coverage.

  • Understanding Common Exclusions: Most life insurance policies contain standard exclusions, such as death due to suicide within a specified period from the policy start date (usually two years) or death resulting from illegal activities or acts of war. It’s essential to familiarize yourself with these common exclusions to ensure you understand the limitations of your coverage.
  • Policy Specific Exclusions: Some life insurance policies may have additional exclusions based on your individual risk factors, such as hazardous hobbies or occupations. These exclusions are often added as endorsements or riders to the policy and can significantly impact the coverage provided. Be sure to carefully review any additional exclusions that may apply to your specific policy.
  • Impact on Beneficiaries: Ignoring policy exclusions can lead to denied claims, leaving your beneficiaries without the financial protection you intended. By understanding the exclusions within your policy, you can take steps to ensure your loved ones are adequately protected, even if certain circumstances are excluded from coverage.
  • Making Informed Decisions: Being aware of policy exclusions allows you to make informed decisions about your coverage. If you find that certain exclusions are unacceptable or too restrictive, you can discuss your concerns with your insurance agent or broker and explore alternative coverage options.


Protecting your loved ones with life insurance is a responsible and caring decision. By avoiding the common pitfalls outlined in this guide and regularly reviewing your policy, you can ensure that your family is adequately protected without breaking the bank. Remember, the best time to purchase life insurance is now – don’t wait until it’s too late to secure the financial future of those who matter most.

Frequently Asked Questions (FAQs) About Life Insurance Pitfalls

It’s recommended to review your life insurance policy at least once every two to three years, or whenever you experience a significant life event, such as marriage, divorce, the birth of a child, or a change in income.

Yes, you can have multiple life insurance policies from different providers or even from the same provider. Having multiple policies can help you customize your coverage to meet various needs, such as protecting your mortgage and providing income replacement.

Depending on the type of policy you have, you may be able to make changes after purchase. For example, some term policies allow you to convert to a permanent policy without undergoing a new medical exam. Be sure to discuss any potential changes with your insurance agent to understand your options and any associated costs.

In most cases, life insurance death benefits are not taxable to the beneficiary. However, there may be tax implications if the death benefit is paid to your estate or if you have a cash value policy with a substantial cash surrender value. Consult a tax professional for guidance on your specific situation.

Find a solution for what you’re looking for

Being aware of life insurance pitfalls and taking the necessary steps to avoid common mistakes will help ensure that you secure the right coverage for your needs, providing your loved ones with the financial protection they deserve in the event of your passing. At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need.

To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta including areas such as Ottawa, Kitchener, Medicine Hat, and Nanaimo

Talk to an advisor today.

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