One may consider buying life insurance for several reasons, be it due to a recent marriage, a newborn baby, or a large debt like a house mortgage. Life insurance can help loved ones tide over financial constraints if something happens to the insured individual. So, it is crucial to sign up for a plan that will give the best value for one’s money. In addition, one must avoid some common mistakes when buying life insurance.
Waiting too long to buy the insurance
An important factor that one needs to consider while buying life insurance is to know the coverage amount that one needs as well as the overall cost or premium of the insurance. In general, the life insurance premium depends on multiple factors including the overall health and age of the insured person. As one ages, the life insurance premium amount increases. Moreover, in case there are serious health problems or illnesses, one may become ineligible to apply for any coverage. Therefore, never wait around for too long to buy life insurance. Purchasing it earlier means one can get it at the lowest prices.
Purchasing the cheapest life insurance policy
It makes sense to buy an insurance policy that is affordable. However, one still needs to look at what they may get in return through the coverage. Some life insurance policies may have the cheapest prices, but their terms and features may not be beneficial. For instance, one may purchase a term life insurance plan at a very low price. But these insurance plans provide coverage for only a fixed period such as 20 years. But if one requires permanent life insurance coverage for end of life, term insurance plans may not work. For lifetime coverage, one will have to look into plans with a slightly higher premium. These lifetime insurance plans also work as robust investment options as they help in building cash value. So, it would be a mistake to hop onto the cheapest insurance plan one comes across without checking the various features and benefits involved.
Being over-insured or under-insured
This may happen if one’s income fluctuates over time. One may end up buying more coverage, which can lead to missed opportunities in terms of additional investments or savings. Or one may end up purchasing less coverage, which means their loved ones will find it difficult to sustain. To know which coverage is right, one must consider their income over the long term. They also need to factor in the income of their partner. This means taking into consideration whether their partner will be working for the long-term or plans to quit work after a while. Based on this, one will have to consider that the policy should cover their income, funeral costs, and mortgage. Further, if kids are involved, the policy should pay the college tuition or any other expenses such as the children’s wedding costs.
Not paying insurance premium on time
Buying a life insurance plan means one has to pay regular premiums to get the necessary coverage. These premiums are usually based on one’s age, overall health, and several other factors. One needs to be diligent while paying these premiums. A late payment even for one month can have a negative impact on the policy benefits one can avail. This is particularly true for universal life insurance plans that provide long-term guaranteed protection. These plans guarantee to maximize the amount of insurance available per dollar of premium. So, if one happens to miss a month’s payment, the guarantee on the policy may cease.
Forgetting that life insurance is also an investment
A life insurance policy is considered as an investment by the Financial Industry Regulatory Authority (FINRA). So, it would be a mistake to forget this fact, especially if one has signed up for a variable life insurance policy. These are similar to permanent policies that include life insurance protection with added benefit of cash value. Some percentage of the premium adds to the life insurance plan and the remaining premium adds up to the cash value. This cash value goes into making several investments such as mutual funds. Over the long term, these investments can give returns that supplement one’s retirement income. So, it is important to pay the premiums on a regular basis to get the best returns on the insurance plan.
Lending from the life insurance policy
Generally, permanent life insurance policies provide the benefit of accumulating cash value over a time. This cash value can be a useful source of emergency funds when one has to borrow money. For instance, one can use it for tax-free withdrawals. While this can be an advantage, one needs to be careful when deciding to borrow money from the insurance policy. This is because most insurance policies end up lapsing if one takes out too much money out of it. It will run out of money and all the gains that one has taken out from the insurance will become taxable. Further, the benefits that one was initially able to avail from the insurance will dwindle. So, it could be a mistake deciding to borrow money from the insurance policy unless it is absolutely necessary.
Depending only on group life insurance
Many organizations offer group life insurance to their employees as part of the benefits package. While this may provide an extra layer of financial security, it is not sufficient for most people. It can be a mistake to not have a personal standalone life insurance plan and relying solely on the employer-provided group insurance. Also, the group life insurance is not transferable. This means when one leaves the organization, they can not take the insurance with them. So, the coverage may not be useful when one decides to leave the job. This can be a problem if one ends up leaving the job when they are years older and may have several health issues. Moreover, finding an affordable individual life insurance coverage in such a scenario may also be difficult.