Life insurance is an important purchase that provides significant financial protection. Consumers do not want to buy the wrong type of life insurance. They also don't want to buy too much or too little insurance.
Buying life insurance is an important step in protecting loved ones and building a life of financial security. Life insurance ensures that an early death does not result in financial loss, which can lead to a significant loss of quality of life when the deceased ceases to provide income or benefits to the family.
Unfortunately, many people make mistakes when buying life insurance. These mistakes can result in a policy that costs more or doesn't offer enough protection.
No one wants to make the mistake of buying one of the most important financial products of their life, so it's important to avoid these crucial mistakes.
Here are 10 mistakes you must avoid when buying life insurance:
1. Relying solely on group life insurance
Group life insurance is a welcome benefit for employees, but the amount (usually 2x annual salary) employers offer is usually not enough for those who need life insurance. And in many cases, when you leave the company, your insurance ends, leaving your family without a financial safety net.
2. Choosing the wrong type of life insurance policy
Life insurance that gives you a certain number of years is more than enough for most people who need affordable and life insurance. A 30-year-old non-smoker can get $500,000 in 20-year lifetime coverage for less than $5 a week.
Permanent life insurance, like whole life or general life insurance, covers your entire life and includes an investment component known as cash value. Monetary value accumulates gradually. You can borrow at cash value or change the policy to cash.
Permanent life insurance is much more expensive than term insurance because of its lifetime coverage and cash value. Based on the rates we found for a 30-year-old non-smoker, a $500,000 lifetime policy could cost around $5,000 a year for men and $4,400 for women.
Permanent life insurance is an important financial tool for consumers, such as those with lifelong dependents and wealthy people who want to leave money to their heirs to pay estate tax. These policies are complicated, so you need the help of a trusted financial advisor.
3. Buying a policy without shopping around
Life insurance rates for the same coverage vary from company to company. According to our research, the cost of a 20-year life insurance policy worth $500,000 for a healthy, non-smoking 30-year-old male ranges from $255 to $655 per year.
Along with comparing prices, it's also important to check the financial strength ratings of any company you're considering. You want the highest possible odds to make sure your business can pay out if you die. Rating agencies like AM Best offer the highest financial strength ratings.
4. Procrastinating
According to the 2015 Insurance Metrics Survey conducted by industry group LIMRA and Life Happens, nearly a third of Americans believe they need more life insurance, and 33% will suffer financial loss within six months if their family's primary wage earner dies. However, 53% of Americans do not plan to buy life insurance in the next 12 months.
If you need whole life insurance, it is a good idea to purchase it in advance. Life insurance premiums increase with age and the development of diseases such as high blood pressure.
5. Buying the wrong amount of coverage
To find the exact amount of life insurance you need, add up your long-term financial obligations, then subtract your current life insurance coverage (if any) and liquid assets (such as savings). Liabilities can include tuition and other child-related expenses, mortgage and other debt, and your annual income multiplied by the number of years you want to switch.
6. Naming your estate as the beneficiary
In general, it is best to name a trust, organization, or individual whose income you want to be a beneficiary. If you name your estate, the beneficiaries of your estate will not receive the benefit until the probate process is completed, which can take months or even years if the estate is complex.
Life insurance benefits can also be claimed by creditors if you name your property as a beneficiary. Life insurance benefits are generally protected from creditors when you name beneficiaries who are not your property.
7. Keeping your life insurance policy a secret
Some people don't like to discuss their personal finances, even with close family members. But someone must know the beneficiary's life insurance to file a claim. In addition to your spouse or adult children, the following people have good reason to know about your insurance: your financial advisor, your estate planning attorney, and anyone you name named in the will as your personal representative or executor.
8. Naming a minor as a beneficiary
It is not advised to name children as beneficiaries on a life insurance policy when they are minors, as the life insurance company needs a court-appointed guardian before it can pay benefits.
Naming a spouse or trusted adult as the beneficiary is preferable. Alternatively, setting up a life insurance trust for the children and name the trust and trustee as the beneficiary would also be effective in ensuring that the money goes to intended recipients according to established guidelines.
9. Owning the policy on your life insurance if you have a big estate
If you own a property large enough to be subject to federal property taxes, you should not buy life insurance. As of 2015, property values exceeded $5.33 million for singles and $10.86 million for couples.
Life insurance income may be included in your taxable property if your property is worth more than this exemption. You can also take out a trust to buy insurance or transfer premiums to adult beneficiaries to maintain and pay for insurance. You may contribute up to $15,000 per year to those exempt from federal taxes.
10. Forgetting to update beneficiary designations
Financial advisors recommend reviewing the policy every few years to provide adequate protection and update beneficiaries as needed. Be sure to review your insurance coverage after major life events such as marriage, divorce, remarriage or the birth of a child.
By avoiding these all common mistakes, you can make sure your life insurance does what it’s supposed to do.