5 Costly Mistakes In Your Life Insurance Policy
Life insurance is your shield against unexpected (or eventual) hardship. The proceeds, type, and timing of the insurance need to be tailored to your individual and family needs. Having too much insurance could cost thousands in the long term, and the implications of having no or not enough insurance are worrisome. Here are the five biggest mistakes families make when choosing life insurance policies and how you can avoid them.
Mistake #1: Underestimating Your Cost of Living
Unfortunately, many individuals spend their spouse's life insurance benefits within a matter of months, leaving very little to sustain long-term living. Having children can make the situation even more challenging. According to the USDA, the average cost of raising a child through to the age of 17 is just over $233,000, and this does not include college expenses.1
Get an unbiased, no-nonsense analysis of your current and future expenses to protect you and your family against financial hardship in the unfortunate event that you need to rely on an insurance policy. Then, check your policy to see if it could support the current and future costs of living for you and your loved ones. Knowing what your family will require will allow you to update your insurance to meet those goals.
Mistake #2: Misunderstanding Your Term Life Insurance Coverage
If you carry a low-premium term insurance policy, then you're paying lower premiums for higher coverage. However, your premium and payout amounts will fluctuate with age. In this way, relying on term insurance is equivalent to renting a home. You gain no equity in your account, and the longer you live, the more the insurance companies profit.
Consider buying an insurance policy that allows your premiums to build equity and provide an insurance safety net. There are many life insurance products on the market, and making the right choice can be challenging. Make sure you consult an insurance expert and tailor your portfolio accordingly.
Mistake #3: Overpaying for a Policy
A single person with no dependents needs only enough insurance to cover final expenses. Even though life insurance is cheaper for the young, buying extensive coverage earlier in life could be costly and a waste of money.
Adjust your life insurance needs to your life changes to eliminate monetary concerns for your loved ones upon the event of your passing. This way you won't overpay for a policy that you won't need.
Mistake #4: Purchasing Too Many Policies
Banks, airlines, car rental agencies, and even credit card companies offer life insurance policies. These policies are incredibly profitable to the provider and are rarely collected on.
Instead of taking out policies with these types of providers, purchase life insurance from an insurance provider. If your provider covers all of your concerns, then avoid purchasing unnecessary insurance from a range of sources.
Mistake #5: Neglecting to Reassess Your Policy
You don't want to wait until a tragic event occurs to check your insurance policy. Many life changes elicit a review of your current policy. You should always have at least two backup beneficiaries and make sure that they are current. You may also wish to consider making your children backup recipients.
Generally, it's wise to review and update your insurance policy every three years. This is especially important if you rely on term insurance with time limits, as gaps in coverage can affect the term of your policy.
Understanding common life insurance mistakes can help you determine your current and future needs, and save money in the long run. Make sure to always consult your insurance provider before making any changes to your life insurance policy.
1. USDA.gov, Feb 18, 2020 (most recent data available as of July 2022)
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. 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. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. 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. Copyright FMG Suite.