Life insurance is designed to provide financial security to your loved ones after you are gone. Depending on your situation, this money might help to pay off debt, fund your spouse’s retirement, or help support your children’s education. There are several different types of policies to choose from. If you do not understand all the facts, a mistake could spell financial disaster for those you leave behind. When shopping for a policy, you will want to watch for and avoid these major missteps.
Life insurance should be a major part of almost every financial plan. Working with an advisor can help to answer your questions not only about life insurance and the different types of life insurance available to you but how it can contribute to the overall health of your financial plan.
Mistake #1- Choosing the Wrong Type of Life Insurance Policy
Mistake #1: Choosing the Wrong Type of Life Insurance Policy
There are two basic types of life insurance. These are commonly known as term life insurance and permanent life insurance.
- A term life insurance policy pays a specific death benefit and remains in place for a predetermined period. A death benefit is a payout to a beneficiary of a life insurance policy, annuity, or pension after an insured loved one dies. Term life insurance can typically be purchased for 5, 10-, 15-, 20- or 30-year terms.
- Permanent life insurance remains in effect throughout your life. Whole life, variable life, and universal life insurance are different types of permanent insurance. A whole life insurance policy allows you to build cash value you can draw against later. Universal and variable life policies are tied to different types of investment vehicles. A universal life insurance policy is a flexible policy option with features like adjustable premiums and death benefits. While a variable life insurance policy is a type of life insurance policy where the death benefit and cash value are invested in sub-accounts, similar to mutual funds.
What are the different types of life insurance?
When deciding between permanent and term life insurance, you must evaluate what you want from the policy. Weighing your goals against the cost of each policy is also an important step. For example, a term policy may be the best option if something happens to your spouse and you only need enough to help pay mortgage or credit card payments. On the other hand, you may be looking for a policy that will allow you to earn some returns on your investment. If you do not mind paying a little more, you might want to consider a permanent policy.
If you are overwhelmed by the choices and unsure how a life insurance plan fits your other financial goals, speak to a financial advisor. This allows you to discuss what is important to you, such as retirement, paying for a child’s college education, etc., in the context of making sure you can meet those goals for your family if something happens to you.
Mistake #2- Underestimating Your Life Insurance Needs
Mistake #2: Underestimating Your Life Insurance Needs
In addition to choosing which policy type is right for you, you must decide how much of a death benefit you need. It is unwise to pick a number out of thin air. If you do not fully understand their needs, you risk possibly leaving your beneficiaries short later on.
To do this, you must consider several factors when calculating how much life insurance you need. These factors include your age and overall health, life expectancy, income, debts, and assets. If you have already built a sizable nest egg and have little debt, you may not need as much coverage. On the other hand, if you have young children and your spouse does not work, you may need enough coverage to provide for them financially.
You will also want to be accurate in the value of a non-working spouse. In the case of their death, you will not need life insurance to replace lost income. That money, however, can still help cover new expenses like childcare, food or housekeeping.
Mistake #3- Not Comparing Life Insurance Rates
Mistake #3: Not Comparing Life Insurance Rates
Like any other type of insurance, you must shop around to ensure you get the best rate. Signing up for a life insurance policy without comparing rates from different companies could unnecessarily cost you money.
When you are reviewing the different types of life insurance quotes made available to you, you’ll want to make certain you provide the same information to each insurer. You also need to review the different policies to see if there are any major differences in life insurance quotes and coverage. This helps ensure you get the most accurate quotes and the proper coverage to help supplement retirement savings.
Mistake #4: Focusing on Life Insurance Costs
Mistake #4: Focusing on Life Insurance Costs
In some cases, the cost of buying life insurance may be enough to scare you away or tempt you to reduce your coverage amount to obtain a lower premium. However, life insurance is not something you can afford to skimp on.
Considering your out-of-pocket costs is a more immediate concern. You will need to determine if the money you save now is worth the effect it could have on your family after you are gone. If you find life insurance too pricey, you may need to review your budget. Reviewing your budget helps you determine what cuts may be available before opting for less coverage.
Mistake #5: Waiting Too Long to Buy Life Insurance policy
Mistake #5: Waiting Too Long to Buy Life Insurance policy
The earlier you buy life insurance, the better. This is because life insurance premiums only increase as you get older. Even if you are in relatively good health, you will still pay more yearly if you wait to buy a life insurance policy. In addition, the longer you wait, the more you risk developing a serious illness or disease, which may result in much higher premiums or being denied coverage altogether.
Bottom Line
Once you decide on a life insurance policy, do not make the mistake of sticking it in a drawer somewhere and forgetting it. Take the time regularly to review your policy to make sure it continues to fit your needs. Knowing you have adequate coverage can provide peace of mind, not only for yourself but those you love.
Insurance Planning Tips
- Selecting an insurance policy can affect your overall finances, especially once you retire. Why is it important to choose the right insurance policy? If you lack insurance coverage, your loved ones may struggle financially when you’re gone. However, if you purchase too much coverage, it could drain your savings and investments. Thus, it is important to find the right balance of life insurance that fits your budget and provides adequate financial protection for those who depend on you.
- If you are unsure of which policy to go with, a financial advisor may be able to help. Always remember life insurance is a long-term purchase. It should be purchased with the understanding it will provide your family with financial security for many years to come. By taking the time to work with a financial advisor, you can not only consider all of the options and can ensure you have chosen the best policy for your needs.
Financial planning is vital for achieving your goals for your future. Life insurance can be a major part of these plans, in addition to investing and other financial strategies. Learn more about beneficial financial strategies and common investments when you join Planning Made Simple. Not only are Planning Made Simple coaches available to help to guide you and answer your questions about things like life insurance, but fellow like-minded investors can share best practices and advice on what’s worked for them in common situations. Learn more about the benefits of becoming a member of Planning Made Simple today.