Most people want to make sure their family is taken care of once they pass away. This is why they consider buying permanent life insurance.
The question then becomes: how much money will your family need? How much will it cost for that amount of coverage?
In this article, we’ll cover the 12 most common mistakes people make when buying life insurance. The tips here will help you avoid common pitfalls, find the best insurance coverage, and secure your family’s future.
Not Buying Enough Life Insurance
It’s common to underestimate how much money your family will need if you pass away. You’ve can easily calculate how much you need to protect your mortgage, pay for college fees, and funeral expenses. But it’s the expenses that you don’t predict which can leave your family financially stressed.
One of the most overlooked costs is unpaid work such as cooking, cleaning and childcare. If you or your spouse pass away, will your dependents be able to manage these tasks? Do you have another family member that they can rely on, or will they need to hire outside help? Your life insurance policy should also help to cover these costs.
Most insurers have online calculators to give you a rough estimate of how much coverage you’ll need. It’s often recommended to get enough cover to cover at least 10 times your annual income. The rationale is that if your family invests this money wisely, they will likely get a return of around 8% – which is roughly equivalent to your current salary – each year. Of course, these figures are based on historical data, and markets may change in the future, but the hope is that your family will be able to live on the returns of your life insurance payout indefinitely.
Putting off Purchasing Life Insurance
Nobody likes to think about death, particularly when you’re young. However, the longer you wait to get life insurance, the more it can cost you.
Insurance application forms usually ask about your health and lifestyle, and insurers use this information to determine if they will insure you and how much they will charge you. As you get older, you are more likely to develop health problems. Starting a life insurance policy when you’re old and sick will cost you a lot more than starting one when you’re young and healthy.
Buying the Wrong Type of Life Insurance
When most people think of life insurance, think of whole life coverage, but do you need to be covered indefinitely? After all, life insurance is supposed to replace the income you provided to your family, but once you retire, you may have retirement savings to live off. For this reason, most people choose term life insurance instead. It covers them until retirement and is much cheaper than whole life insurance.
Don’t forget to also plan for other scenarios. For example, if you become sick or injured and can’t work anymore, you won’t be able to claim life insurance. Have you covered yourself for this possibility using income protection, disability, or medical insurance?
Buying Life Insurance with Too Short a Term Length
If you choose a short-term policy of 5 or 10 years, you’ll need to renew it once it expires. Insurers treat renewals like a new policy, which means you’ll need to complete a medical exam again, and you may be subject to higher premiums.
For this reason, most financial advisors suggest taking a long-term approach to life insurance. You may want to pick a policy that covers you until retirement age. Or a policy that cover you until your children become financially independent. The term you need will depend on your circumstances and financial plans, so you may want to discuss it with your insurance advisor.
Not Naming an Appropriate Beneficiary for Your Life Insurance
If you don’t name a beneficiary for your life insurance policy, it will be paid out to your estate. Your estate may be subject to tax, and your creditors can use it to cover your debts before your family even sees a penny. If you want the insurance money to stay with your loved ones, you must list them as your beneficiaries on the policy.
To cover your bases, you may also want to list secondary beneficiaries as a backup in case your primary beneficiary dies. If you are leaving money to a minor, there may be guardianship or trustee issues to consider, which can be complex and time-consuming. If you want your children to be able to access the funds easily without having to go through the courts, consider consulting a lawyer. They can help you set up the inheritance paperwork, including the beneficiary on your life insurance, to avoid potential legal pitfalls.
Not Shopping Around for the Best Value Life Insurance
Once you’ve decided on the type of life insurance product you want, how much coverage you need and how long you want to be covered for, it’s time to shop around. Prices can vary a lot across insurers, and doing your homework now can save you a lot of money in the long run.
If you are feeling overwhelmed by the large number of choices, you may want to consider comparison websites or insurance brokers. You can still get a great deal on life insurance through a broker, but it’s a good idea to do a little research yourself too.
Getting too Many Riders on Your Life Insurance Policy
Think of riders on life insurance policies like optional extras. Brokers will try to sell you on them since they get extra commission, but many riders have little to no value. Chances are, you probably won’t even use them. To keep your insurance costs reasonable, avoid paying for bells and whistles that you don’t need.
Not Mentioning Pre-Existing Conditions When Filling Out Life Insurance Applications
When you fill out your insurance application, you must be truthful and transparent. If you deliberately leave out any medical issues or pre-existing conditions, the insurance company can refuse to pay your benefit when the time comes.
If you develop a critical illness during the term of the policy, however, you are not obliged to inform the insurer. This is because when they issue your policy, the insurer factors in the chance that you may get sick in the future, and they work this into their premium calculations.
Not Updating Existing Insurance Policies
Life events can change your insurance needs. If you have a child, take on a mortgage, or get a raise, you will likely need more coverage. Most insurers will let you increase your cover, and if you notify them quickly after the life event takes place, you probably won’t need to go through the health assessments again.
Check with your insurer to find out how long the notification period is and what forms you may need to fill out. If you are outside the notification period, your insurer can treat the increased cover as a new policy, and you may be charged higher premiums as a result.
It’s also helpful to note that positive health changes like quitting smoking, reducing your cholesterol, or healing from an illness, can reduce your premiums, so it’s worth talking to your insurer about them.
Cancelling Your Coverage
Cancelling your life insurance is easy. Reapplying for it again later is not. You’ll need to fill out the forms and complete the health checks again. Your premiums will likely be higher since you’re older, and the insurer may refuse to cover pre-existing conditions, even though you had coverage for them before.
If you are near retirement, you may be considering if you should keep your life insurance after you stop working. Whether you should cancel it or not depends on your retirement plan and savings. Will your spouse be able to live comfortably after you pass away? Or will they need extra life insurance money to be financially secure? Are there other people who still rely on you for financial support, such as your grandchildren?
You may want to consult a financial planner to work out your retirement plan and decide if your savings will be enough to support your family in the event of your death.
Missing Your Monthly Premium Payment
If you miss your scheduled premium payment, you have a grace period (usually up to 30 days) to fix the situation before your life insurance ends. Once the insurance lapses, you may be able to reinstate it, without health checks, for a limited time. Your insurance policy will state how long you have after it lapses to reinstate it and if there are any costs involved.
If you leave it too long, you’ll need to apply for a new policy. This means going through the forms and health assessments again, and of course, you could be charged higher premiums.
Not Telling Others About Your Policy
This may seem obvious, but your insurance company will not automatically know when you have passed away. Someone will need to inform them of your death and start the process to claim your insurance. If you don’t want to tell your family or beneficiaries about the policy, consider leaving the information with a professional who is handling your affairs, such as your lawyer.
The Bottom Line
Getting the right life insurance for the best price is important. By implementing these simple strategies, you can make the financial process easier for your family after you’re gone.