Life insurance is an investment for your loved ones. In the event of your death, it’s vital that your family is protected, covered, and in a healthy financial position without you.
Unfortunately, life insurance is complicated business, so where do you begin?
Before you take out a life insurance policy, you’ve got to do your research and have a thorough understanding of what it’s all about.
To help you through the process of purchasing life insurance, we’ve compiled a list of the 5 biggest mistakes people make when taking out a life insurance policy.
Keep reading so you know what to do (and what not to do) when you’re ready to take out yours.
Why Is Life Insurance Important?
Life insurance is an investment in your family’s future to provide financial relief when you’re gone. It’s a way to guarantee that your loved ones will be taken care of when you can no longer provide for them.
With life insurance, a policyholder pays a monthly premium; if the policyholder passes away while the coverage is still valid, beneficiaries receive a cash payment, known as a death benefit.
Life insurance is an absolute must for most people with a spouse and children. With life insurance, you can cover the cost of a variety of expenses, including your funeral arrangements, but it can go much further and cover mortgages, college education, and monthly bills.
Without life insurance, your family could face financial hardship when you die.
How Can I Get Life Insurance?
There are a variety of ways to get life insurance. Before you take out your policy, it’s important to understand the differences and how each method of getting it can affect you in the long run.
- Group Life Plan
One way to get life insurance is through a group life plan offered through your employer. For a nominal amount, you can secure a life insurance policy that typically pays one or two times your annual salary when you die.
But there’s a caveat.
If you have group life insurance through your employer, you’ll lose the coverage when you leave the company. When you leave, you’ll no longer be a part of the employee “group” and, in most cases, your coverage will lapse.
- Through An Insurance Company
You can also get life insurance directly through an insurance company. You can shop around and review multiple policies from multiple providers in order to find the policy that’s best for you. Many companies offer bundles that can save you money if you have your life, homeowners, and auto insurance through the same provider.
- Through An Insurance Agent
An insurance agent can help you navigate the difficulties of finding the proper policy, but they don’t always have your best interest at heart. You can find insurance agents that represent several different providers, but not all of them. So keep in mind that they’ll only sell you a policy from a provider they work with.
- Through An Online Insurance Broker
Using an online insurance broker is a good way to narrow down your policy options. It’s an easy way to get comparative prices and get a sense of what a variety of different policies have to offer. You won’t get the personalized relationship you would get with a traditional insurance company or agent, but this method is becoming increasingly popular.
The Biggest Life Insurance Mistakes to Avoid
When it comes time to purchasing and maintaining a life insurance policy, you need to know the pitfalls to avoid.
Here are the 5 biggest mistakes you need to avoid when taking out a life insurance policy.
- Procrastinating
Don’t wait until it’s too late to buy life insurance. Insurance rates and premiums increase as you age and your health declines. You can buy an insurance policy as early in life as you want, though most people make the mistake of waiting until later in life.
If you’re young and in good health, you’ll be able to get a better policy for a lower premium, but it all depends on your personal situation.
Single people, unmarried people, and people who don’t have children often don’t see the need for life insurance. After all, who will you leave the money to when you die?
The fact is, even if you’re single and have no children, it’s a good idea to take out a small policy, at least one that can cover the cost of your burial. Without money to cover your funeral and burial costs, friends and relatives will be stuck paying the bill.
You can always start with a small policy when you’re in your 20s and increase the coverage as you age. By doing that, you’ll pay much lower rates than you will if you wait until you’re in your 50s or 60s.
The best time to update your life insurance policy is when your situation changes. If you get married or have a child, you should assess your situation and make sure you have enough coverage to support the people that rely on you.
- Choosing The Wrong Type Of Insurance
There are two main types of life insurance policies: term life and whole life. There are a lot of differences and distinctions between the two, so make sure you understand what you’re buying into before you take out a policy.
Term life insurance pays out within a specified “term.” Most policies have terms of between 10 and 30 years. In order for your beneficiaries to collect the benefits, you have to pass away within the specified term.
Think about how many years you will need to pay your mortgage, pay your bills, and cover expenses for minor children. If you’re 45 and plan to start “self-insuring” at age 65, a 20-year term may be all you need.
When picking a term life insurance policy, you need to think about how your family would survive if you couldn’t provide for them. If in 30 years your children will be grown and your house will be paid off, you might want to opt for a 30-year term.
Term life insurance premiums are lower than whole life insurance premiums. But there’s one important thing to keep in mind: If you’re still alive and well when the term is up, you get nothing.
Whole life insurance is more of an investment. The premiums are more expensive, but your beneficiaries are guaranteed a payout, regardless of when you die.
Whole life policies also accumulate cash value that you can borrow against as you age. In some cases, they’re even eligible for annual dividends. The cash value of your policy will grow slowly over the years and will remain tax-deferred, so you won’t have to pay taxes on those gains.
Whole life insurance is also a good investment if you have a child with special needs who may need lifelong care. You can use your life insurance to set up a trust to pay for that child’s medical bills and living expenses.
The other benefit is that it is easier to sell your whole life insurance policy. People sometimes sell their life insurance policies if they need cash more than their beneficiaries need the death benefit.
It is possible to sell your term life insurance policy, but the process is a little more complicated.
- Buying The Wrong Amount Of Coverage
One of the biggest mistakes that people make when buying life insurance is buying too little. It’s natural to want to keep your premiums low, but it’s more important to make sure you have enough protection to keep your family and dependents financially secure.
Whatever you do, don’t under-insure yourself. Make sure your policy will cover whatever you owe on your mortgage. Make sure you can cover the cost of your children’s educations. And make sure that you can cover all of the expenses needed to pay for the cost of your children’s daily expenses (if they’re minors).
Buy enough coverage to take care of all of your outstanding debt. Buy enough to cover your funeral and burial expenses. Think about everything that your family is going to need to get by when you’re gone and make sure your policy offers enough coverage (and more).
- Buying A Policy Without Shopping Around
Don’t buy a policy based solely on price. Just because it’s inexpensive and seems like a good deal, it could be just the opposite.
Before you decide on the policy you want, shop around to see what various insurance companies have to offer. Compare and contrast the terms, the premiums, the coverage, and the payouts. All of those things are important to understand before you sign up for a policy.
As we mentioned earlier, insurance agents can be quite helpful in the process. They can help you navigate the various terms and understand the nuances that each policy has to offer.
Just remember this:
Independent insurance agents often represent several insurance companies, but they don’t represent all of them.
The insurance agent you choose will be limited to only selling you a policy for a provider that they represent. In other words, if there’s a better policy from a competing insurance company, you may never know about it. They’re certainly not going to tell you about a plan that they aren’t authorized to sell to you.
- Forgetting To Update Your Beneficiaries
Don’t forget to keep your beneficiaries up to date. To avoid this pitfall, make sure you update your policy as life-changing events occur.
If you get married, you probably want to make your spouse a beneficiary. If you get divorced, you might remove them. If you have children, it might make sense to add them as beneficiaries.
Basically, any time someone important enters or leaves your life, take the time to update your beneficiaries.
Other Mistakes To Avoid When Buying Life Insurance
The 5 mistakes detailed above are the most common ones that people make all the time. But if you really want to be prepared when you take out your policy, here are some other things to keep in mind.
- Don’t Keep It A Secret From Your Family
Unless you’re afraid that your spouse is going to poison you to collect on your insurance policy (it happens), you should always let your family know you have one.
By knowing that a policy exists, they’ll be able to collect the benefits sooner and rest assured that they have financial security after you’re gone.
- Don’t Undervalue Your Stay-at-home Spouse
Just because a spouse stays at home and raises the children doesn’t mean that they don’t work. If you die and your spouse needs to get a job outside the home, make sure your insurance policy covers the cost of childcare and living expenses.
- Make Sure You Understand The Terms And Payout Conditions
Insurance policies are complex documents – and each one has different terms and payout conditions. Before you sign on the dotted line, make sure you understand the policy thoroughly. You don’t want you or your family to be caught off guard once it’s too late to do anything about it.
Life insurance is complicated – so do your research and make sure you understand what you’re buying into.
Shop around to get the best policy. Understand the difference between term life and whole life so you can decide which one you want. Buy the right amount of coverage. Keep your policy updated as life-changing events occur. And, most importantly, don’t wait until it’s too late.
Avoid these pitfalls, and you’ll be able to get a find a policy that works for you and keeps your loved ones financially secure when you’re gone.
Author Bio: Scott Abramson is the head of growth at Mason Finance. He graduated with a B.S. in economics from Duke University.
