Mistakes are a fact of life. You live, you learn, you move, and if you paid attention you don’t make the same ones again. The problem when it comes to life insurance mistakes is you may not find out about the mistakes you make until it’s too late.
The solution is to not make the errors in the first place. The best way to avoid life insurance mistakes is to know what they are. Here are 10 life insurance mistakes to avoid:
Not enough coverage
Having some life insurance is better than having no life insurance. While true, this isn’t the best way to think about it if you want to avoid life insurance mistakes. That thinking doesn’t acknowledge that the purpose of life insurance is to provide for your loved ones.
The trap of not having enough life insurance can leave your survivors vulnerable. The more people who depend on you now, the greater your need for insurance will be.
Your children will still need to pay for college. Your mortgage will need to be paid. Your other financial obligations will have to be resolved by your spouse and heirs. Life insurance can help resolve those expenses, unburdening your family.
Same old rules
For many years people relied on one-size-fits-all rules for buying life insurance. One of those rules was the seven times income rule for figuring out how much life insurance you needed.
Like all one-size-fits-all rules, it sounded good, but it wasn’t based on sound principles. The problem is it doesn’t take into account your unique circumstances. Imagine if you had a twin who had the same income and longterm debts as you, but has one child and you have three. Your twin may have too much insurance and you may not have enough.
Rather than rely on old rules and fall for life insurance mistakes, use a modern calculation method. Start by multiplying your income by the number of years you have until retirement. Then you can subtract taxes and what you would spend on yourself each year. Be sure to include things like your own health insurance and medical expense from what you subtract.
The number you are left with is a good starting point for the amount of life insurance you should have. Of course you will have to fine tune it up or down depending on your family situation.
Ignoring the future in life insurance mistakes
No matter what stage you’re at in life you probably don’t spend a lot of time looking down the road. It’s human nature to want to live in the moment, but ignoring the future puts your family and yourself at risk and can be one of our life insurance mistakes.
Thinking about the future comes in two parts, the short term and the long term. Ignoring your short term future puts your survivors, especially children, at risk if you die tomorrow.
On the other hand, ignoring your long term future is forgetting the rest of your life. When you ignore the future, you don’t take into account what will be the changing needs of your family and yourself.
Thinking about the future also includes a world with you still in it. That means thinking about your own retirement and the role life insurance can play. Thinking about the future now will help you find the right mix of term and permanent life insurance for all your needs so you can avoid life insurance mistakes.
Focusing on price
You may be under the impression that life insurance is too expensive or beyond your current budget. It is true that some types of life insurance can be costly, but there are alternatives such as term insurance that can be real bargains.
A healthy, non-smoking, 30-year-old man would pay $24.57 per month for a $500,000, 20-year term policy. That is more than 10 times less than the cost of a whole life policy for the same amount of coverage.
Too short of a term
The trap to avoid when it comes to term insurance is insuring too short of a term. Term insurance policies can be for periods of as little as five years.
When you consider term insurance you should base your decision on the worst case scenario where you pass away tomorrow. How many years will it be before your youngest child will be financially independent?
Term insurance is a great low cost way to provide protection for your family. However, failing to plan long term can leave you vulnerable down the road and lead to life insurance mistakes.
Not doing a regular review
Keeping up with your own life can be a challenge. Your life today is not the same as it was 10 years ago. Your life today may be radically different than it was even a year ago.
You may have gotten married, had a child, or purchased a home. Your life can get complicated quickly, and your life insurance needs can change just as fast.
While you’re busy expanding your life and your responsibilities your insurance sits still. It can become more obsolete each year. Not doing a regular review of your life insurance can leave you open to being underinsured, one of the difficult life insurance mistakes worth avoiding.
Lying on your application
Any lie you make on a life insurance application can result in your policy being cancelled. This includes something as small as changing your birthday from Nov. 11 to Nov. 12.
If your deception is found out after your policy is issued and a claim is made the insurance company can refuse to pay your beneficiaries. Your best bet is to be completely honest on your insurance application and avoid life insurance mistakes.
Insurance companies consider things you forget to mention as lies. This includes any medical conditions or medications, including those for ailments such as depression.
Casual smoking — Skip the cigar
Any nicotine that shows up in your system before your insurance is issued will raise your premium. That includes a cigar you didn’t inhale at a celebration to a pinch of chewing tobacco. Seeing your rates rise is among the life insurance mistakes you don’t want to happen.
Once you test positive for nicotine no explanations or excuses will stop the insurance company from charging you a higher rate. Depending on the sensitivity of the test nicotine may be detected up to 15 or more days after you last smoked or chewed tobacco.
Wrong type of policy
There are four types of life insurance and none of them are right for everyone. You may have read that term insurance is always the best insurance to buy. Perhaps a friend or relative told you that you should only buy permanent insurance.
Whatever the reason, buying the wrong type of insurance can result in your not having enough insurance. You could end up paying more than you have to, or even not having coverage when you need it most.
Before you buy insurance you should consider each of the different types of life insurance. The amount of coverage you need and what you can afford and make a decision based on what is best for you.
Waiting too long to buy
There are lots of clichés about why it’s best to take action sooner rather than later and they can all be applied to life insurance and lead to life insurance mistakes.
The younger and healthier you are, the lower your life insurance premium will be. The cost of waiting to buy life insurance may be why you’re unable to get insurance at all, resulting in one of the most costly life insurance mistakes. It can also drive up the cost forcing you to get less insurance than you need.
The best strategy for buying insurance is to do so as soon as the need arises. After all, the one thing that is certain about the future is that there is nothing certain about the future.
