There are numerous compelling reasons to consider purchasing a life insurance policy, including a recent marriage, a new infant, or incurring a substantial debt (such as a home) that your loved ones would struggle to repay if you died.
Perhaps you have seen firsthand the financial impact that death has on remaining family members.
If you’re looking for life insurance or have previously purchased a policy, make sure you don’t jeopardise your family’s money by making these blunders.
Getting Life Insurance
A life insurance policy is a financial contract that provides a death benefit to a person’s heirs or other beneficiaries in the event of their death.
The goal of this death benefit is to replace any present and future income lost as a result of that person’s death, to settle any remaining debts and obligations, and to provide some extra money as an inheritance or legacy.
Today’s life insurance industry is highly competitive, with numerous organisations offering various sorts of plans and products.
Term life insurance is the most fundamental type of coverage, offering a fixed death benefit for a given number of years (e.g., 20 years).
If you want to continue your coverage after the term expires, you must reapply.
Permanent life insurance can cover you for the rest of your life and frequently includes a cash accumulation component.
These insurance have higher premiums than term policies, but they also provide additional perks and value.
The application process will be the same regardless of the form of insurance you choose.
You will be asked to supply basic information, your financial situation, and to take a health survey.
In addition to the survey, you may be required to attend a paramedical exam, during which a skilled healthcare expert will examine you and may request blood and urine samples for examination.
This is due to the fact that life insurance rates are based on the statistical likelihood that you will die and the insurer will have to pay out a claim.
As a result, insurance rates are frequently lowest for younger people (who are often healthier and have a higher life expectancy) and healthier adults.
Those with health issues or who lead riskier lifestyles (for example, smokers) might expect to spend more.
You will be required to pay recurring coverage premiums once approved (which can be set anywhere from monthly to annually).
The insurance will remain in force as long as you continue to pay your premiums; otherwise, it will lapse and your coverage will be lost.
Also read: Top 5 Benefits of Life Insurance
Top 5 Life Insurance Mistakes To Avoid
1. Waiting to Buy Insurance
When acquiring life insurance, it is critical to evaluate both the amount of coverage required and the cost.
The cost of life insurance is determined by a variety of criteria, including your age and overall health.
Purchasing a life insurance policy sooner rather than later can work to your advantage if you want to get the best deal available.
Rates for life insurance typically rise as people age or their health deteriorates.
In addition, illnesses or health concerns may make you ineligible for coverage in some situations.
The longer you wait to obtain insurance, the more it will likely cost—if you can buy it at all.
2. Buying the Cheapest Policy
While it is crucial to look for a policy that is reasonably priced, it is also important to examine what you are getting in terms of coverage.
Because life insurance policies can be confusing, it’s a good idea to educate yourself on their features and benefits.
Term life insurance, for example, is less expensive than permanent life insurance.
However, there is a catch: term life insurance only covers you for a defined period of time, whereas permanent life insurance insures you until death as long as your premiums are paid.
If you anticipate you will only require life insurance for a limited time, such as 20 or 30 years, a term life policy may be an affordable option.
However, if you desire lifetime coverage or a life insurance policy that generates cash value as an investment vehicle, it may be worth it to spend more in premiums for permanent coverage.
Compare the prices of various life insurance policies to see what you might be giving up in exchange for a better deal.
3. Allowing Premiums to Lapse
When you buy life insurance, you must pay a premium in exchange for coverage.
Once again, these premiums can be determined by your insurance risk class, which is determined by your age, health, and other characteristics.
If you’re thinking about purchasing a universal life policy with secondary guarantees—low-premium guaranteed death payments for life or for a set length of time—a late payment can have an influence on the policy’s benefits.
Universal life is a sort of permanent insurance policy that has been marketed as providing long-term assured protection at the lowest feasible rate—it is not the same as term insurance.
While many of these plans include a cash surrender value, universal life with secondary guarantees focuses on providing the most insurance for the least amount of money.
Some of these policies are susceptible to premium payment timing.
For example, if you miss a monthly payment or send in your check more than a month late, your guaranteed coverage may no longer be guaranteed.
If one payment is late or missed, insurance purchased with assured coverage to age 100 may only give protection to age 92, which could be problematic if you live longer.
4. Forgetting Insurance Is an Investment
The Financial Industry Regulatory Authority (FINRA) considers variable life insurance policies to be investments, therefore you should as well.
A variable life insurance policy is a form of permanent policy that provides life insurance with a cash value.
A portion of the payment is used to pay for life insurance, while the remainder is invested in various investments comparable to the mutual funds that you select.
The value of these accounts, like mutual funds, fluctuates and is determined by the success of the underlying investments.
People frequently look at these policy values in the future to boost their retirement income.
A variable life policy must be adequately funded to maximise cash value increase.
This includes continuing to make adequate premium payments, particularly during periods of low investment returns.
Paying less than you intended can have a significant impact on the monetary value accessible to you in the future.
It is also critical to evaluate the performance of your policy and rebalance your accounts on a regular basis, just as you would with any investing account.
This can help you avoid taking on more risk than you intended when you set up your account.
5. Borrowing From Your Policy
Permanent life insurance plans with cash values may be a source of funds if you need to borrow money.
If done correctly, the cash value of a permanent policy can normally be utilised for whatever purpose you see fit, including tax-free withdrawals and loans.
This is a significant benefit, but it must be managed properly. If you withdraw too much money from your insurance and it lapses or runs out of money, all of your gains will be taxable.
Not to mention that you may considerably limit the death benefit available to your beneficiaries if you die.
If you have taken too much money out of your policy and it is set to lapse, you may be able to keep it by paying more premiums, if you can afford them.
When accessing the cash value of your life insurance policy, keep a tight eye on it and consult your tax expert to avoid any unexpected tax burden.