Life insurance is designed to provide some financial security to your loved ones after you’re gone. Depending on your situation, the money could be used to pay off debt, fund a secure retirement for your spouse or help your children pay for their education. There are several different types of policies to choose from. If you don’t know the facts, it could spell financial disaster for those you leave behind. When you’re shopping around for a life insurance policy, here are a few major missteps you’ll want to watch out for.
Find out now: How much life insurance do I need?
Choosing the Wrong Type of Policy
There are two basic types of life insurance: term and permanent. Term policies pay out a specific death benefit and remain in place for a set period of time. Term life insurance can typically be purchased for a 5, 10, 15, 20 or 30-year term.
Permanent life insurance on the other hand stays in effect over the course of your life. Whole life, variable life and universal life are all types of permanent insurance. A whole life insurance policy allows you to build cash value that you can draw against later on. Universal and variable life policies are tied to different types of investment vehicles.
When you’re trying to choose between permanent and term life insurance you need to assess your goals and weigh them against the costs. For example, if you only need enough coverage to pay off the house or credit cards if something happens to your spouse, a term policy may make the most sense. If you’re looking for something that will allow you to earn some returns on your investment and you don’t mind paying a little more, you may want to look into a permanent policy.
Underestimating Your Insurance Needs
In addition to choosing a policy type, you also have to decide how much of a death benefit you need. If you’re just picking a number out of thin air, you run the risk of your beneficiaries coming up short later on.
There are several factors you’ll want to consider when calculating how much life insurance you need. These include your age, overall health, life expectancy, your income, your debts and your assets. If you’ve already built a sizable nest egg and you don’t have much debt, you may not need as much coverage. On the other hand, if you have young children and your spouse doesn’t work, you’ll need enough insurance to provide for them financially over the long-term.
The other big mistake you want to avoid is underestimating the value of a non-working spouse. Even though you won’t need life insurance to replace lost income, the money can still be helpful if you need to cover added expenses, such as child care or housekeeping help.
Not Comparing Rates
Like any other type of insurance, you’ll want to shop around to make sure you’re getting the best rate. Signing up for a life insurance policy without comparing rates for a few different companies could end up costing you money unnecessarily.
When you’re looking at multiple plans you want to make sure you’re providing the same information to each insurer. You also want to review the different policies to look for any major differences in the coverage. This helps to ensure you’re getting the most accurate quotes.
Focusing on Price
In some cases, the cost of buying life insurance may be enough to scare you away. But it’s not something you can afford to skimp on. When you’re looking at the different types of policies, it can be tempting to reduce the coverage amount so you can score a lower premium.
While you’ll be paying less out of pocket, you need to think about whether the money you’ll save is really worth it in terms of how your family may be affected. If you’re finding that life insurance is too pricey, you may need to take a look at your budget to see what you can cut back on before you opt for less coverage than you really need.
Waiting Too Long To Buy
The sooner you buy life insurance, the better. Premiums will only increase as you get older. Even if you’re in relatively good health, you’ll still pay more for every year you put it off. Not only that but you also run the risk of developing a serious illness or disease which may result in much higher premiums or being denied coverage altogether.
Once you decide on a life insurance policy, don’t make the mistake of sticking it in a drawer somewhere and forgetting it. You should take the time to review your policy regularly to make sure it still fits your needs. Knowing that you have the coverage you need can provide peace of mind, not only for yourself but those you love.
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