When it comes to life insurance, you don't want to make any mistakes. There are the seemingly obvious ones, like not being honest on the application or waiting till it’s too late. If you know the potential for error, they are easier to avoid. Here, we will give you our top 3 common mistakes that people make and how they could impact your financial future.
Life Insurance is never cheaper than today. Most people believe that they don’t need life insurance when they are just starting out in life. The reason behind this usually comes down to two simple thoughts:
- I do not need insurance right now
- I cannot afford it.
These thoughts show the lack of credible information about costs and how life insurance policies and options can benefit them financially. We teach children to save and invest money, starting as young as possible. We do this because there is a common belief that it helps create an understanding of long-term financial value.
Read: The Perfect Age to Get Life Insurance
We rarely hear the same information given about insurance or life insurance. For example, many life insurance policies can offer guaranteed insurability clauses, paid-up options or the ability to borrow against the cash value. These are all benefits that get more costly as you age or your health changes.
If you start with a policy at a young age and become uninsurable, you will have some coverage regardless of if it is less than what you may need. Unfortunately for most, life insurance only becomes relevant when they have a health issue or have added dependants into the mix. Not the ideal time to find out you don’t qualify, or discover the cost is unaffordable.
#2 Assuming Group and Loan Insurance is Guaranteed
While having group insurance or mortgage and loan insurance may be beneficial, most plans only offer a basic and fluctuating life insurance amount.
Read: Loan Protection Insurance: What You Should Know
Among the many issues with these types of insurance policies is that they are underwritten only after a claim. This means that the insurance company may not pay your claim if you have underlying or undisclosed medical issues. Individually purchased policies, in contrast, are underwritten at the time of purchase.
When you combine this risk with the fact that group policies are usually only valid while you are part of the group, it seems like a huge cost to pay for something with so many variables.
Here is an example:
Let’s say you quit working full time at 55 to start a side hustle with only $5000 left on your $500,000 mortgage. In this case, you will no longer have that group coverage that you probably contributed towards for the last 25 years, and all the money that you paid towards mortgage insurance will give you a whopping $5000 if you died today. Meaning, you paid for $300,000 – $500,000 worth of coverage for many years only to receive $5000. If you had paid for the same $300,000 – $500,000 on a personal policy, you would still have $300,000 – $500,000 of coverage. The financial cost of having to start over and purchase $500,000 of coverage at age 55 is not worth the convenience of relying on your group coverages alone.
#3 Underestimating the Coverage You Need
There are many ways to earn a living or have value for your family in today’s day and age without having a regular 9-5 job or salary. It’s essential to be realistic about the amount of coverage you need.
Take inventory of how much money your family will need to meet immediate expenses if you are no longer living. Calculating funeral expenses, legal fees, outstanding debts and mortgage balances is just the starting point.
The amount of money your family will need to maintain their standard of living plus the added costs during this transition period need to be considered. A common mistake is underestimating the financial value that family members who are maintaining a home and caring for children or elderly parents bring.
In these situations, it’s important to look at the cost of hiring in-home caregivers, house cleaners and taking care of day-to-day activities and not just the income or salary they contribute.
Read: Life Insurance for Stay at Home Spouses: Wasteful or Prudent?
As you can see, there is more to understanding life insurance than choosing the right policy type. By avoiding these mistakes, you could save you thousands of dollars in premiums and help set yourself and your family up for a more prosperous financial future.
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