Life insurance is a form of financial protection that can help survivors pay off debt, cover living expenses, and more when the policyholder passes away. Despite the importance of life insurance, it’s easy to make errors when purchasing a policy that can result in financial disaster for loved ones instead of a safety net. Here are several of the most common life insurance mistakes consumers make.
Choosing the wrong policy type
There are many forms of life insurance, although they all fall under two broad categories: term insurance and permanent insurance. A term life insurance policy remains in effect for a specific term, such as 10 or 30 years, with a specific death benefit. When the term ends, coverage is over. Permanent life insurance remains in effect as long as the premiums are paid. There are a few types of permanent life insurance, including those that can build cash value, according to the Insurance Information Institute.
When choosing a life insurance policy, consider long-term goals and the cost. Permanent life insurance can be cost-prohibitive whereas term insurance offers coverage when most consumers need it most with much lower premiums.
Waiting too long to purchase a policy
Two primary factors determine life insurance premiums: the applicant’s age and health. Premiums are virtually guaranteed to increase with age, even for applicants in good health. Putting off buying insurance also risks the development of an illness or disease that can result in even higher premiums or denied coverage.
Underestimating insurance needs
Policy type is important, but it’s also essential to choose an adequate amount of coverage. There are many factors that are involved in determining how much insurance coverage loved ones will need, including the applicant’s life expectancy, income, general health, age, and household assets and debts. Households with sizable savings and little debt likely do not need much coverage, but a household with young children and one spouse who does not work will need more financial protection.
According to Bankrate, the industry standard recommendation is 7-10x the applicant’s annual income, although this rule will not work for everyone.
Failing to compare rates
Life insurance premiums for the same coverage can vary a great deal by company. For example, a healthy, non-smoking 30-year-old man purchasing a $500,000 20-year term life insurance policy may pay anywhere from $244 to $655 per year, according to NerdWallet.