Having a life insurance policy is a good idea for anyone who wants their family to be protected financially if something should happen to them.
It can help prevent your loved ones from having to pay off any debts that you have after you pass away.
However, there are several common mistakes that many people make when it comes to getting life insurance coverage.
Here are seven of the most common life insurance mistakes and how they could hurt your financial efforts.
1. Buying too much insurance coverage
One thing you don’t want to do is buy too much life insurance coverage because no one needs more than a million dollars of coverage unless they have a child with special care needs or substantial debt.
For most people, would be enough to cover the financial losses that their family would suffer after they pass away.
2. Not understanding how insurance works
It is important to know how your life insurance policy works before you purchase one. You want to make sure that it will actually pay out when you die and what happens if you cancel it or let it lapse for less than two years (which many people do).
If you don’t understand how long the benefits will last for your beneficiaries, then you should talk with an agent about all of the options available before buying one.
3. Buying Life Insurance through One Company
When purchasing life insurance through an agent, you should compare the rates at four to five different companies.
No matter how reputable your existing company may be, you might get a better deal by shopping around and comparing offers from other agents and companies.
4. Not Understanding the Policy
It is very important that you read your life insurance policy before signing it or accepting it in order to make sure that there aren’t any hidden costs or rules that weren’t mentioned in the sales pitch.
For example, some policies limit how much money can go toward funeral expenses so you need to understand what types of costs are covered and when they will payout.
The above four mistakes could cost you money if not understood or avoided when purchasing life insurance coverage for yourself or your family members.
However, getting the right policy and the right amount of coverage in place can help to protect your loved ones when you pass away.
In my situation, I needed more than what my employer was willing to cover by the time I reached 40 years old – so I came up with a plan B solution that continues to work well for me today: whole life insurance.
Whole life insurance offers permanent death benefit protection at fixed premiums once its ‘non-cancellable’ status is accepted.
While a little is more expensive than traditional term life coverage, whole life insurance provides a guaranteed level of protection at a fixed cost for the next 30 to 50 years.
Unfortunately, I have seen some people get sold “permanent” or “whole” life policies that don’t deliver on what they promise.
For this reason, it’s extremely important that you understand how much coverage you need and shop around to compare rates from several agents before purchasing one of these policies.
5. Understand How Term Coverage Works
In most cases, term life insurance is considered the least expensive way to cover yourself in the event that something unexpected happens.
With this type of policy, you will receive either a monthly or yearly premium payment (usually paid upfront) that will remain level for the duration of the contract – which is usually up to 30 years.
If you pass away before the end of your term policy, your beneficiary (normally a spouse or children) will receive a death benefit payout that could be used to cover funeral expenses, outstanding debt, or other financial obligations.
The downside to this type of coverage is that if you outlive your term life insurance protection, your policy will expire and leave you unprotected.
So what do I use today? As mentioned above, I now purchase both whole life insurance and universal life insurance (which combines features from both traditional and term policies) in order to create my own hybrid ‘whole/universal’ solution.
This mix provides me with great coverage at lower costs than what I would have to pay if I relied on a single type of policy.
6. Understand How Guaranteed Universal Life Insurance Works
While whole life insurance and term life insurance are both great options, they can also be a bit complicated for those who aren’t familiar with them.
This type of policy combines the low premium flexibility of universal coverage with the convenience and security of term protection into one easy-to-understand plan.
Basically, your premiums will remain level throughout the duration of your contract (usually up to 20 years) and you’ll receive an interest rate credit each year that usually increases the value of your death benefit payout over time.