When it comes to life insurance, it’s easy to make a mistake. Here are some common mistakes and how to avoid them.
1. Getting the wrong type of insurance
When you’re thinking of getting insurance, there’s a tendency to focus on just getting life insurance. Death isn’t your only or even biggest risk. What about disability, critical illness, or long-term care insurance? Part of your budget could be better spent on these harmful financial risks, which are more likely.
2. Getting the wrong term
If you buy term 10, your rates will jump dramatically every 10 years. If you’re healthy, you can apply for new insurance, which is often cheaper than renewing. You can’t guarantee your future health, however. A safer option is choosing a term longer than you think you need. Your choices aren’t limited to 10, 20, or 30 years. There are products that let you pick the term, such as 12- or 34-year terms.
3. Underinsuring yourself
Life insurance could easily cost less than you expect if you’re young and healthy. For a small additional cost, you could add more coverage and also provide a huge gift to your beneficiaries.
4. Ignoring discounts
Increasing the face amount could cost you less since you get volume discounts as you buy more. You could find that $250,000 costs less than $200,000. Also, $500,000 doesn’t cost twice as much as $250,000.
Getting coverage on your partner from the same insurer also often leads to discounts as does buying another form of insurance at the same time (for example, term life insurance plus either critical illness or disability insurance).
5. Buying term and not investing the difference
Permanent life insurance with a cash value combines insurance with tax-sheltered investments. It’s easy to think that you’re better off buying term life insurance and investing the difference yourself. Will you really invest the rest? You might find the discipline of forced savings in insurance suits you better. You can then use the equity you’re building to take breaks from paying premiums.
6. Limiting your options
When you buy term life insurance, you often have the contractual right to convert to permanent life insurance without underwriting up to a specified age like 65. That means the insurance company won’t ask about your health or finances. You may think you’ll never want permanent life insurance but your situation could change. Some insurance companies have more or better permanent plans. Buying term from a larger insurer gives you more options.
When you buy permanent life insurance, you have several choices. With term 100, you lose the opportunity for tax-sheltered growth because there’s no savings component. For roughly the same price (or sometimes less), you could get universal life insurance with a level cost of insurance. This gives you additional funds to invest.
7. Not reviewing coverage regularly
There’s more to life insurance than paying premiums. Your situation changes continually. Maybe you have a different partner but haven’t changed your beneficiary. Maybe you’ve added to your family through a birth or an adoption. Reviewing your life insurance once a year lets you see if adjustments are needed.
With permanent life insurance that has a cash surrender value, you can request projections to see if your coverage is performing as planned.
8. Cancelling coverage
Cancelling insurance is easy. Getting it back isn’t. You could make a decision you’ll wish you hadn’t at a later time. Explore your options before you decide.
You can only buy life insurance before you need it. Since you can’t predict when you’ll die, delaying buying insurance brings risks. If you can’t afford as much as you’d like, you could get what you can afford and top it up later.
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