Decisions regarding life insurance can be some of the most important decisions you’ll make for your family. Being aware of these costly mistakes below could help you.
Delaying the Purchase of Life Insurance: Typically speaking, if you need life insurance it’s better to buy it sooner than later. Life insurance rates can increase as you get older and your health might change. 43% of Americans feel their family would face financial difficulty within 6 months if the primary wage earner died. Buying a policy can feel overwhelming. But dragging your feet won’t things better if you need to get life insurance.
Buying a Policy You Don’t Completely Understand: This might sound irrational, but it happens. Sometimes people buy a policy due to pressure from a family member for example. Or sometimes people don’t ask enough questions when they purchase a life insurance policy. It’s important to fully understand all aspects of the policy you purchase.
Buying the Wrong Type of Policy: Be sure to match the right type of policy with your needs. Term life insurance could be a good choice if you won’t need a policy in the future for whatever reason. But if you need to repurchase a policy it could be more expense down the road. Permanent life insurance (whole life or universal life) can be more cost effective long-term. But it might be more expensive when the policy starts. Consider the priorities, preferences and needs of your family when you choose the type of policy.
Buying the Wrong Amount of Coverage: Some people second guess their policy purchase - you could end up wondering if it will be enough coverage or if you are paying more than necessary for too much. Determining the right amount of coverage requires honest answers to some tough questions about: educational needs of children, debt to be repaid, income required to maintain a happy lifestyle, available assets, etc. Also you need to calculate cost of living increases and how long the life insurance proceeds will last along with your available assets.
Naming a Minor as a Beneficiary: Lots of people buy life insurance for the future benefit of their children. However, it’s generally considered a bad idea to name children beneficiaries on a policy if they are minors. If you pass away before they reach adulthood, the life insurance company can’t pay benefits until the court appoints a guardian. This could take time and involve possible court costs plus attorney fees.
Naming Your Estate as the Beneficiary: If you name your estate, your real beneficiaries won’t receive benefits until the legal probate process is finished (which can take months or even years). The life insurance money could also be subject to creditor claims. Typically it’s better to name a trust, an organization or specific people as beneficiaries.
Naming Just One Beneficiary: Many people assume that listing one person as a life insurance beneficiary will be enough. Unfortunately, it’s possible that your one beneficiary could pass away before you do. If this happens the proceeds of your policy are paid to your estate. So it’s smart to include at least one or two “backup” beneficiary.
Failing to Update Beneficiaries: Things in your life can change during the time you own a life insurance policy. Certain changes in your life might make it necessary to update your beneficiaries. A few examples are: your spouse passes away, you get divorced, you get married, you have a child or maybe a current beneficiary changes their name or moves to a new address.
Keeping Your Life Insurance Policy a Secret: The right people need to know about your policy so the beneficiary can make a claim. Other than a spouse or your adult children, it makes sense to share your policy information with an estate planning attorney. Also anyone you appoint in your will as the personal representative or executor of your estate should know about your life insurance.
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Sources: LIMRA, Principal, ACLI
This content was produced to provide information on a topic that may be of interest and developed from sources believed to provide accurate information. This information is not intended as insurance, tax or legal advice.
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