8 Common Mistakes to Avoid When Buying Life Insurance
Buying life insurance is on of the most important decisions you are going to make. You buy it to protect your family from getting caught out financially. When you’re shopping around for a life insurance policy, here are a few major missteps you’ll want to watch out for.
Underestimating Your Insurance Needs
In addition to choosing a policy type, you also have to decide how much of a death benefit you need. If you’re just picking a number out of thin air, you run the risk of your beneficiaries coming up short later on.
There are several factors you’ll want to consider when calculating how much life insurance you need. These include your age, overall health, life expectancy, your income, your debts and your assets. If you’ve already built a sizable nest egg and you don’t have much debt, you may not need as much coverage. On the other hand, if you have young children and your spouse doesn’t work, you’ll need enough insurance to provide for them financially over the long-term.
The other big mistake you want to avoid is underestimating the value of a non-working spouse. Even though you won’t need life insurance to replace lost income, the money can still be helpful if you need to cover added expenses, such as child care or housekeeping help.
Waiting too long to buy insurance
Why we do it: Often, a lot of us don't even think about buying insurance until something happens in our lives that prompts us to remember it—and remember how important it can be. That's long been true of products like health and renters insurance, and it's similarly true of life insurance.
What we should do instead: Whenever you go through a major life change—such as getting married, having a child, or buying a house—sit down and give serious thought to purchasing some form of life insurance if you don't already have it. (And if you do have some amount of life insurance, review it and make sure it will adequately protect you and your family, or other loved ones, in the event the unthinkable happens. If it won't, you should increase your coverage level until it does.)
Regardless, it's important to not drag your feet if you have people in your life who will suffer financially should something happen to you, or if you would suffer should something happen to your spouse or other family member. After all, the rates you're quoted are only going to go up as you get older or as you begin to deal with various health issues—and at some point you may well not be able to buy it at all.
Not Comparing Rates
Like any other type of insurance, you’ll want to shop around to make sure you’re getting the best rate. Signing up for a life insurance policy without comparing rates for a few different companies could end up costing you money unnecessarily.
When you’re looking at multiple plans you want to make sure you’re providing the same information to each insurer. You also want to review the different policies to look for any major differences in the coverage. This helps to ensure you’re getting the most accurate quotes.
Only naming one beneficiary on your policy
Why we do it: It's hard to say, but a good guess seems to be that most of us simply assume that listing just one person as a beneficiary on our life insurance policies will be enough. The problem with that is that lone beneficiary could pass away before you do, a situation that would end with the proceeds of your plan being paid to your estate—which causes a bunch of other problems for any survivors it’s eventually passed on to.
What we should do instead: Make sure you include at least one "backup" beneficiary on your plan, and don't be shy about including two.
Borrowing too much money from a whole life policy
Why we do it: There are all kinds of reasons people withdraw money from the "cash value" portion of their whole life (or permanent) policies. Maybe a health crisis pops up that requires a lot of medical care—and produces a lot of medical bills. Or maybe something more mundane happens that prompts you to pull out some portion of your cash value as a loan.
What we should do instead: Although the cash value that's built up within your whole life or permanent policy can be really helpful, especially in times of need, it's important to carefully approach withdrawals and loans that make use of those funds. The main reason for this: if you take out too much, you could cause your policy to lapse or run out of money.
Changing a Policy after Taking a Loan
Permanent life insurance policies such as whole life, for example, have a cash accumulation value. After a certain point in the life of the policy, you are allowed to borrow against that cash value. If you have done so, and then decide to change your existing policy, the status of the loan can change as well. The reason is because if the new policy does not contain a carry over of the loan you took out on the old policy, its status changes to that of a gift and becomes taxable.
Picking a policy based only on price
Why we do it: Whenever we're given a choice between similar products of various prices, most of us immediately lean toward the one with the lowest price. It's just how we've been conditioned as consumers. Unsurprisingly, a lot of people exhibit those same tendencies when they go to buy life insurance—even though picking the cheapest option usually isn't the best idea.
What we should do instead: Start by considering your needs and the needs of the people you want to protect with life insurance. From there, look for policies that will provide you and your loved ones with benefits, features, and other options that will satisfy those needs. This is where things can get complicated, so be sure to ask your insurance agent or broker for help—clarification, explanations, etc.—if you need it. Once all of that is out of the way, feel free to factor price back into the equation.
Choosing the Wrong Type of Policy
There are two basic types of life insurance: term and permanent. Term policies pay out a specific death benefit and remain in place for a set period of time. Term life insurance can typically be purchased for a 5, 10, 15, 20 or 30-year term.
Permanent life insurance on the other hand stays in effect over the course of your life. Whole life, variable life and universal life are all types of permanent insurance. A whole life insurance policy allows you to build cash value that you can draw against later on. Universal and variable life policies are tied to different types of investment vehicles.
When you’re trying to choose between permanent and term life insurance you need to assess your goals and weigh them against the costs. For example, if you only need enough coverage to pay off the house or credit cards if something happens to your spouse, a term policy may make the most sense. If you’re looking for something that will allow you to earn some returns on your investment and you don’t mind paying a little more, you may want to look into a permanent policy.
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