Life insurance is an essential part of most people’s financial plan. You never know what can happen, and life insurance is exactly that: insurance that if something should happen to you, your loved ones will be taken care of. However, the world of life insurance is complex, and it’s easy to make mistakes along the way. Here, we’ll discuss some of the common mistakes people make and how you can avoid making them yourself.
Mistake #1: Not getting enough insurance
It’s easy to underestimate the amount of life insurance you need. Too often, people decide how much coverage based on the premium they can afford. Some insurers will recommend, for example, that you take out coverage that equals your annual salary multiplied by, say, 10 – in other words, enough coverage to take care of your family for 10 years after your passing. But what about after that? What if you have a mortgage, or children’s education to pay for? That ten-year amount won’t cover it. When determining how much coverage to get, consider:
How much it would cost to repay all of your outstanding debts
Enough left over to cover all monthly living expenses for your dependants
Any future obligations you foresee, such as paying for your child’s wedding or education.
These factors will give a clearer picture of the amount of insurance you will need than a randomly assigned amount based on multiplying your income.
Mistake #2: Opting for the least-expensive policy
Of course, it’s natural to want to opt for a policy that will save you a few dollars today, but this is not usually a good strategy. Opting for an insurer that offers a policy that is much cheaper than others could mean that the insurer won’t be able to insure you in the event of your unexpected death, or that they will drag their feet and take too long to fulfill the claim, leaving your family in the proverbial lurch. When choosing an insurer, ask to see statistics about their claims settlement duration times. Only choose a company that has a solid record of settling claims quickly.
Mistake #3: Buying the wrong insurance plan
Too many people think of buying life insurance as an investment. As compared to the return you can get from other types of investments, buying life insurance simply doesn’t stack up. That doesn’t mean that you shouldn’t have life insurance – everyone should – but it’s best not to look at it as an investment. Instead, look at life insurance as what it is: protection for your family’s future. Investments are a separate entity and should be treated as such.
Mistake #5: Drawing on the policy before maturity
There will inevitably be times in life when an immediate influx of funds is necessary, and it can be tempting to cash in on a life insurance policy to get the funds you need. This is a mistake. A life insurance policy should never be touched unless and until the policy holder passes. You never know what hand life will deal you, and you can leave your family in a bad situation if you cash in on your life insurance policy and bank on the fact that you’ll be able to buy another policy when your financial luck takes a turn. Remember, too, that the older you are, the costlier life insurance premiums can become.
Instead of using your life insurance policy as a safety net in the event of a bad situation arising, plan for such events in your budget by creating a “rainy day” fund.