Life insurance is your shield against unexpected (or eventual) hardship. The proceeds, type and timing of the insurance should be tailored to individual and family needs. Having too much insurance could cost thousands in the long term, and the implications of having none or not enough are worrisome. Here are the five biggest mistakes families make with life insurance policies and how you can avoid them.
Mistake #1: Underestimating Your Cost of Living
Unfortunately, many individuals are forced to go through their spouse’s life insurance benefits within a matter of months, leaving very little sustainability. Having children may make this more challenging. According to the USDA, the average cost to raise a child through to the age of 17 is just over $233,000, not including college.1
Get an unbiased, no-nonsense analysis of your current insurance needs to protect you and your family against financial hardship. Check your policy and see if you and your loved ones could maintain your current or future cost of living. Knowing what your family will require will allow you to update your insurance to meet those goals.
Mistake #2: Misunderstanding Your Term Life Insurance Coverage
If you carry a low-premium term insurance policy, then you’re paying lower premiums for higher coverage. However, your premium and payout amounts will fluctuate with age. In this way, relying on term insurance is like renting a home in that you gain no equity in your policy. If, thankfully, nothing has happened to you after a 20-year term, the insurance company keeps the premiums paid and your policy expires.
An alternative is buying permanent insurance where your premiums build equity and provide an insurance safety net. There are many term and permanent life insurance products on the market and making the right choice is challenging. Make sure you get advice from an insurance expert and tailor your portfolio accordingly. Beware of strong-arm sales tactics when reviewing insurance proposals and push back (or ask for clarification) when needed. You don't want to be sold something; you want to a policy that integrates with your comprehensive financial plan.
Mistake #3: Overpaying for a Policy
A single person with no dependents needs only enough insurance to cover burial costs. Even though life insurance is cheaper for the young, buying big coverage earlier in life could be costly and a waste of money.
Assess your life insurance needs as life changes to eliminate monetary concerns for your loved ones upon the event of your passing. This way you don’t overpay for a policy that you won’t need. For example, once the mortgage is paid off, that may be a trigger to review your policy and you may determine that you don't need as much coverage due to the mortgage having been retired. This is an assessment that should be made with your insurance agent or financial planner.
Mistake #4: Purchasing Too Many Policies
Banks, airlines, car rentals and even credit card companies offer life insurance policies. These policies are incredibly profitable to the provider but are rarely collected on.
Instead, purchase life insurance from an insurance provider. If your provider covers all your concerns, then avoid purchasing insurance from unnecessary sources.
Mistake #5: Neglecting to Reassess Your Policy
You don’t want to wait till a tragic event occurs to check your insurance policy. Many life changes elicit a review of your current policy. You should always have at least two backup beneficiaries. Are they current? What about making the children backup recipients?
Generally, it’s a good idea to review and update your insurance policy every three years. This is especially important if you rely on term insurance with time limits, as gaps in coverage can affect the term of your policy.
Understanding common life insurance mistakes can help you determine your current and future needs and save money in the long run. Make sure to always consult your insurance provider or financial planner before making any changes to your life insurance policy.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.