Life insurance is designed to provide some financial security to your loved ones after you’re gone. Depending on your situation, the money can help pay off debt, fund your spouse’s retirement 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 shopping for a policy, you’ll want to watch out for and avoid these major missteps.
1. 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 deciding between permanent and term life insurance, you’ll need to assess what you really want from the policy. Then you can weigh those goals against the costs of each policy. For example, if something happens to your spouse and you only need enough to cover mortgage or credit card payments, a term policy may make the most sense. But maybe you’re looking for a policy that will allow you to earn some returns on your investment. If you don’t mind paying a little more, you may want to look into a permanent policy.
If you are overwhelmed by the choices and unsure of how a life insurance plan can fit into your other financial goals, you might want to speak to a financial advisor. This way you can discuss what is important to you (retirement, paying for a child’s college education, etc.) in the context of making sure you are able to meet those goals for your family even if something happens to you.
2. Underestimating Your Insurance Needs
In addition to choosing a policy type, you also have to decide how much of a death benefit you need. It’s probably best to avoid just picking a number out of thin air. If you don’t do your homework, you run the risk of selling your beneficiaries short later on.
You’ll want to consider several factors 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.
You will also want to avoid underestimating the value of a non-working spouse. In the case of their death, you won’t need life insurance to replace lost income. However, that money can still help cover new expenses like child care or housekeeping help.
3. 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 unnecessarily costing you money.
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.
4. Focusing on Price
In some cases, the cost of buying life insurance may be enough to scare you away. Or you could be tempted to reduce your coverage amount to score a lower premium. But life insurance is not something you can afford to skimp on.
Looking at your out-of-pocket costs is a more immediate concern. You’ll need to think about whether the money you save now is really worth the affect it could have on your family when you’re gone. If you’re finding that life insurance is too pricey, you may need to take a look at your budget. Try to see what you can cut back on before you opt for less coverage than you actually need.
5. 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.
If you have any questions, consider talking to a financial advisor. Many financial advisors consider life insurance a crucial part of a financial plan and can guide you on what’s right for your situation. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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