Consumers often underestimate the potential to make mistakes when it comes to life insurance. Perhaps is because life insurance is often thought of as a fringe product – something you pay for with whatever is left in your budget at the end of the month.
But life insurance is one of those quiet benefits. While you are alive, you don’t much pay attention to it. And the premiums can be…downright annoying! After all, you have no plans of dying anytime soon. But it’s also one of those plans that becomes all important when catastrophe strikes – in this case, when you die.
Given that it will be so vitally important at a critical time in your family’s lives, it’s important that you avoid common mistakes that people make when they buy life insurance.
Not buying life insurance when you’re young
Most people put off buying life insurance when they’re young. After all, that is the time when there is the lowest perceived need to have it at all. That makes sense, but the disadvantage is that by the time you do need it, you’ll be a few years older. And by then, it will be more expensive.
One of the factors that most affects life insurance premiums is age. If you can buy a large amount of inexpensive life insurance when you are 25 years old, it will be substantially cheaper than a similar amount of coverage will be 10 years later.
When you’re young and single, it’s not possible to know what your future life insurance needs will be. But if you have the opportunity to buy a large amount of inexpensive life insurance now, by all means do so. Though it may not be adequate 10 or 15 years down the road, you will at least have built a solid foundation of coverage at very affordable rates.
Not taking enough coverage
People tend to buy life insurance in round numbers. For example, they may have a death benefit of $50,000 or $100,000. That’s sounds like a lot of money, and it is if you don’t have it saved up. But when it comes to life insurance, you probably need at least several hundred thousand dollars in coverage.
If you’re married and have children, a $100,000 life insurance policy will probably be completely inadequate. If you have a typical sized mortgage – say, $150,000-$200,000 – your life insurance won’t even payoff the mortgage upon your death. The most it may do is provide a subsidy to your family for two or three years.
That may be better than nothing, but it’s not exactly a long-term survival plan for your family either.
Most people don’t make a habit of buying life insurance, so when you are in a buying mood, be sure you are realistic about the amount of coverage you truly need. Don’t skimp on the coverage! Take a term life insurance policy for the longest term possible, that will enable you to get the highest amount of coverage you can afford.
Waiting to apply until after you develop a health condition
Buying life insurance is not one of life’s more pleasant experiences. You’re making contingency plans for your death, and much like preparing a will, you probably want to avoid it.
But if you wait too long to get life insurance – or to get the right amount – you could be taking a major risk in regard to your health. The same life insurance policy that will be easy to get while you are healthy, could be far more complicated if you wait until after you develop a serious health condition. Not only will the policy be more difficult to get, but you will pay a higher premium if you do.
Not adjusting coverage in response to major life changes
A lot of people take a single life insurance policy when they’re young, or perhaps they have one for work, and never update it for changing circumstances in life. But marriage, having children, and buying a home, all create the need to review your life insurance coverage.
Typically, you’ll need to increase your coverage with any these events. Not doing so could leave you with an inadequate level of coverage, and that can leave your family fighting for financial survival in the event of your death.
Buying whole life when term life will do the job better
People sometimes choose a whole life insurance policy, perhaps because it was sold to them by a charismatic insurance salesman, or even because their parents took their own whole life policy 60 years ago and always encouraged you to do the same.
The basic problem is that whole life costs a lot more than term life insurance. Sure, you can lock in the premium for life, but the cost is high and will limit the amount of coverage that you can afford. If you have a family, particularly a young family, you need as much coverage as you can afford. You’ll be able to afford a whole lot more with a term life insurance policy .
