When people buy life insurance, the purpose is to leave behind a mark of financial security to their loved ones after they have passed on. That check can go to pay for many things that you likely planned to pay for yourself, such as helping your spouse retire, putting your kids through college or settling the debt that had accrued over time.
There are many different kinds of policies, and choosing the right one is essential to ensuring that the security that you are purchasing is actually what you get. Take a look at this list of mistakes that people often make when selecting a policy.
7 Mistakes People Make When Buying Life Insurance for the First Time
#1 Selecting the Wrong Kind of Policy
When it comes to life insurance policies, there are two general types: permanent and term. If you buy permanent life insurance, the policy stays in force for the rest of your life. There are three types of permanent insurance: whole life, universal life, and variable insurance. Whole life policies allow you to aggregate cash value that you can later draw money against. Variable and universal life policies are connected to various kinds of investments.
Term policies pay a set death benefit and stay in place for a pre-determined length of time, such as five, 10 or 20 years, with most maximum terms set at 30 years.
The type of policy that you choose depends on what you need from the money. If you need money in place to pay off a mortgage for your spouse and settle some consumer debt, term policies make sense. Permanent policies make sense for people who want to make some returns on their money over time, even though the policies cost more.
Don’t forget to read our article on the least expensive policy type.
#2 Buying Less Insurance than You Need
What do you have in savings now? How healthy are you? How old are you? How long do you expect to live? If you have a big pile of cash stashed away, and your debts are minimal, then you may not need a large death benefit.
Do You Know on Average an American Family Spends Over $57k per Year? Read This.
If you have a stay-at-home spouse and younger children, you will need a significant amount of money as a death benefit. Then there’s the decision of how much of a death benefit to provide for a non-working spouse.
How would your expenses change if he or she passed away? Would you have to pay for childcare? If so, that is an amount to consider.
#3 Buying a Policy without Comparison Shopping
You wouldn’t buy the first car you saw unless you were convinced that it represented the very best in value. The same is true for your insurance policy. It’s good business sense to ask several different carriers to provide rates for you.
It’s important to make sure that you provide each carrier with the same information so that your comparison is “apples to apples.” When you receive your quotes, look at the terms and benefits to make sure that the policies are equivalent as well. These steps make sure that you have the most precise information.
#4 Focusing on the Cost
If your budget is already tight, the added cost of premiums for life insurance might make you think twice about buying a policy at all. Also, you might think about cutting the amount of coverage that you carry so that you do not have to pay as much each month or quarter.
If you want lower premiums now, what would you do with the cost savings? Would you also put that money away to benefit your family in a different way, such as personal savings or other investments? If so, then the reduction in premium might be worthwhile. If not, it might make sense to pay a little more in your premiums now.
#5 Buying When Premiums Have Increased Too Much
The earlier you start buying life insurance in life, the lower your premiums will be. Also, the longer you wait before starting coverage, the more you will end up paying in your premiums.
There’s another factor to consider here as well — the longer you wait, the greater a chance you have to develop one of the conditions that can make the cost of life insurance prohibitive.
Remember — the Affordable Care Act means that health insurers cannot deny you coverage because of pre-existing conditions. It has nothing to do with life insurance, so if you develop an illness or a condition that shortens your expected lifespan, then the costs can really skyrocket.
#6 Setting up Ownership and Beneficiary Information Incorrectly
It is important to name a primary beneficiary and a contingent beneficiary — someone who would collect the money if something has happened to your primary beneficiary. Also, if you go through a major life change that would lead you to want to change your beneficiaries, such as a divorce, you will want to change that information as soon as possible.
Sometimes making those changes is emotionally draining, but it is definitely a better outcome than having the insurance payout go to someone who no longer has any business with your money.
#7 Using the Wrong Time Frame when Planning Payout Amounts
Don’t just think a decade or two ahead when you’re thinking about how much insurance to buy. Think three decades ahead, even if that goes past your expected lifespan.
If something unfortunate happens to you, will there be enough money to provide for your spouse, children and other loved ones over the long haul?
Insurance premiums are an expense, but it does not make much sense to save a little money each month to end up with a payout that doesn’t take care of your loved ones’ needs.