By Carolanne M. Chavanne, CFP
Life insurance is your shield against unexpected (or eventual) hardship. It is rather like placing a monthly bet where only the survivors “win.” The proceeds, type, and timing of the insurance need to be tailored to individual and family needs. Having too much insurance could cost thousands in the long term. And the implications of having none or not enough are obvious.
Here are the 5 biggest mistakes families make with life insurance policies.
1. Inadequate Insurance Amount
Many widows go through their late husbands’ death benefits within just a few months. Also, to raise a child through age 21 — not including college costs — figure about $250,000. Ask yourself if your or your loved ones can stretch your insurance proceeds to pay debts and just go on living. If you cannot answer that, you may not have checked your policy and done the math lately.
2. Your Term Insurance Has Run out or Has Become Too Expensive to Carry
If you have carried a low-premium term insurance policy, you are paying lower premiums for higher coverage than, say, whole life. If your objective is simply to have the security of a big payout if you die, it is meeting your short-term needs. As you age, however, those premiums get higher, or the policy payout gets lower.
Relying on term insurance is the equivalent to renting a home. You gain no equity in your account. The longer you live, the more the insurance company profits.
3. You Bought Life Insurance Before You Needed It
A single person with no dependents needs only enough insurance to cover burial costs. Even though life insurance is cheaper for the young, buying big coverage earlier in life could be costly and a waste of good money.
4. Purchasing Life Insurance From Many Sources
Banks offer mortgage life insurance. Airlines and car rental companies, and even credit card companies offer life policies in case you’re not around to pay the mortgage, or if you die in an air crash or need to pay other expenses. Those policies are hugely profitable to the providers, and the insured rarely collect on them.
5. Neglecting to Review or Update Your Life Insurance Policy
The time to review your life insurance coverage is not right after a tragic event. Many life changes require another insurance review. Are the beneficiaries current? What about the children as backup recipients? (You should have at least two backup beneficiaries.)
Five Ways to Avoid Common Life Insurance Mistakes:
1. Get an unbiased, no-nonsense analysis of your current insurance needs. Know what your family will need and update your insurance to meet those needs and goals.
2. Consider buying insurance policies where your premiums build an equity as well as provide your insurance safety net. There are many life insurance products on the market that provide equity instead of sucking up monthly payments. Get some advice from an insurance expert and tailor your portfolio accordingly.
3. A wise approach for a young person is to wait longer to buy life insurance when he or she is still single and if no one would suffer financially if they die. Again, just get the minimum to pay funeral expenses so as not to be a burden on your family.
4. If you already have adequate life and casualty insurance, don’t bother with expensive products from other sources. The best advice is to only buy life insurance from an insurance provider.
5. Generally, it is a good idea to review and/or update your insurance policy every three years. This especially important if you rely solely on term insurance with time limits that could lapse. You could cause gaps in coverage that in some cases affect the term of the policy.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.