Don’t Make These 7 Mistakes When Buying Life Insurance
Like every important financial purchase, avoiding beginner mistakes will ensure that you get the most out of your life insurance policy. To help you navigate the life insurance industry and get the right policy, we’ve put together this list of beginner mistakes to avoid when buying insurance.
Mistake #1: Waiting Too Long To Buy Life Insurance
As a first-time life insurance buyer, one of the worst life insurance mistakes you can make is waiting too long to buy a policy. Many people put off buying life insurance because it seems like just another unnecessary expense, but this decision will actually impact the price of your life insurance in the long run.
Generally, premium payments increase as you get older. This is because you become riskier to insure as you age, and health concerns become more and more common. This means that if you purchase a policy at 40 years old, the premiums you will pay will be much higher than if you had purchased the same policy when you were 25.
Another reason that putting off buying life insurance is a bad idea is the fact that you can’t predict what will happen to you down the road. It’s morbid to think about, but there are many things that can happen to you that may severely affect your ability to get affordable insurance – for example, getting diagnosed with a terminal disease might disqualify you from purchasing coverage altogether.
If you think you’re going to need life insurance and want to provide a safety net for your family, then purchasing it early will ensure that you and your loved ones will be protected as soon as possible. Doing this will also ensure that you receive more affordable premium rates.
Mistake #2: Relying Entirely On Employer-Provided Insurance
A common mistake many people make is relying entirely on employer-provided life insurance. While they’re great as a supplementary life insurance plan, employer-provided life insurance is often not enough to provide for your family in the long run. This is because employer-provided insurance policies are typically group life insurance plans, which come with some downsides despite being cheaper.
First, group life insurance is not portable since it’s usually part of your employee benefits package. You will lose your coverage the moment you change jobs or get laid off – leaving you unprotected and needing to search for a new policy.
Death benefits from group policies also tend to be lesser in value than the death benefits you would receive from traditional life plans. It may not be enough to adequately provide for your family if anything were to ever happen to you. Having a personalized life insurance policy is still the best way to make sure your loved ones get exactly what they need if you pass away.
Mistake #3: Overestimating Or Underestimating Your Coverage Needs
The price of your policy premiums depends on how much (or how little) coverage you get. The more protection you want, the more you have to pay. The opposite is also true.
Many people realize too late that they didn’t purchase enough coverage. A great way to quickly assess how much life insurance you need is to estimate what financial obligations you want to be covered. This could include:
- Replacing your income
- Paying off large debts
- Covering medical bills and/or funeral arrangements
Add all of these obligations, then subtract that from the assets you will leave behind. The difference between the two is how much coverage you should get.
Another common issue is purchasing too much coverage and ending up with premiums you can’t afford. The truth is that maintaining a long-term life insurance policy can get expensive really quickly, especially if you’re paying for coverage you don’t actually need. Setting your financial goals early on will prevent you from buying a policy that doesn’t fit your needs.
If you over or underestimate your life insurance needs when you apply, you may end up wanting to change your policy down the road. However, this can lead to extra administrative fees. Calculate your desired coverage before you apply for a policy to prevent this mistake.
Mistake #4: Choosing The Wrong Type Of Life Insurance Policy
There are many types of policies available and each one has its own respective pros and cons. Choosing the right policy to fit your needs is the key to getting the most out of your life insurance.
There are two main types of life insurance: permanent life insurance and term life insurance. Whole life insurance (or permanent life insurance) refers to life insurance policies that cover you for your whole life – from the moment you sign the contract until you eventually pass away. These types of plans also provide you with a savings component called cash value that grows as you make your payments.
On the other hand, a term policy will only cover you for a certain period of time – usually covering a 15- to 30-year period. Term policies will still ensure a death benefit for your beneficiaries, but they will typically not earn cash value. These policies are great if you don’t think you’ll need life insurance past a certain point, such as after your kids become financially independent.
You should buy a permanent policy if you need long-term insurance or want to supplement your retirement income with cash value. Save some money and get a cheaper term life policy if you only need life insurance coverage for a set period of time.
Mistake #5: Not Shopping Around And Comparing Life Insurance Rates
One of the most common life insurance mistakes people make is not shopping around before settling on a specific policy. Other than cost, things like policy riders and underwriting standards will vary from company to company. Skipping this step means you’re not exploring all of your options, some of which may be cheaper or better suited to your needs.
The insurance company you choose will affect your potential policy much more than you think. Each life insurance company has its own respective offerings and rates. For example, one company’s basic coverage plan could cost double the money with a competitor. It will be your job to compare their different offerings to find the perfect one that will suit your budget and your needs.
Mistake #6: Not Properly Designating Beneficiaries
“Beneficiaries” are what you call the people or entities who receive your policy’s death benefit or the life insurance money paid after your death. You typically have the freedom to choose your beneficiaries and decide on how you want the death benefit divided among them. It seems easy enough to do, which is why buyers often overlook its importance.
A common mistake people make is naming only one person as a beneficiary, usually the spouse. If the single beneficiary dies before the death benefit is collected, and the designation is not changed before the insured passes away, then the rest of your family members might have problems claiming it.
You should regularly review and update your death benefit beneficiaries, especially after important life-changing events. This includes getting married, getting divorced, or having children.
Mistake #7: Keeping Information From The Insurance Company
Underwriting is an integral part of the application process. As part of this, you’ll likely have to answer a series of questions about your health, lifestyle, occupation, hobbies, medical history, and even driving record. Using the information gathered from these questions, the underwriter will gauge how risky it would be to insure you. This will affect the premium rates of your future life insurance policy.
Make sure to answer these questions as honestly as possible – this will ensure that you get a fair deal. It might be tempting to purposely withhold information to try and get better rates, but getting caught might actually cost you your insurance altogether. Insurance companies will verify the information you give by accessing your records. Any discrepancies found might force them to reject your application.
If you do get away with hiding something, your insurer might refuse to pay out the death benefit, especially if your death was related to the information you chose to withhold. For example, if you hid the fact that you have a medical condition and die from it, the company may not release the benefit money.
The Bottom Line
A life insurance policy is one of the most responsible things you can add to your long-term financial plan. The money paid out through the policy can be used as a safety net to replace your income or pay for any debt you leave behind. Avoiding beginner mistakes will ensure that you and your family will enjoy hassle-free financial security.
If any of this still confuses you, then get in touch with Wesley Insurance, LLC. We specialize in providing all sorts of financial advice – from planning your insurance to managing your investments. Contact us today to learn more about what we can do for you!