Making a mistake with life insurance can hurt the ones you love most. Fortunately, with some advance preparation and careful thought, you can help avoid these costly errors. Here are some of the most common life insurance pitfalls we see:
1. Choosing the cheapest policy
Everyone wants to get a good deal on insurance, but picking the life insurance policy with the lowest premium might cost you (or your family) a lot more later if it’s not the right policy for your needs. A qualified insurance specialist can compare policies and help you get the right insurance without paying more than you need.
Before buying a policy, ask:
Am I getting the right kind of insurance for my situation?
Is the death benefit enough for my family’s needs?
Is the insurance company sound and well regarded?
2. Failing to review your life insurance regularly
Like everything else in your financial life, life insurance isn’t a one-and-done proposition. It’s very important to review your policy occasionally to help make sure it still meets your needs. In the worst cases, an out-of-date insurance policy can lead to problems for your family when they need help the most.
The life events that should definitely trigger an insurance review are marriage, divorce, the birth of a child, paying off the mortgage, and retirement. A comprehensive life insurance checkup should help you answer the following questions:
Is my policy still in force?
Are the beneficiaries current?
Who owns the policy?
Do I have the right kind of insurance for my current and future needs?
Is my policy still competitive?
3. Naming your estate as beneficiary
One of the primary advantages of life insurance is that beneficiaries can receive death benefits quickly. Unfortunately, if you name your estate as beneficiary, your loved ones will lose the ability to collect directly from the insurance company. Instead, they’ll have to go through the probate process and might owe estate taxes on the death benefit. Any creditors you have might also be able to lay claim to the benefits if those benefits are part of your estate. In many states, life insurance proceeds are shielded from the decedents’ creditors when they go directly to beneficiaries.
Avoid creating trouble for your loved ones by specifically naming the beneficiaries you want to receive the death benefit and updating them regularly. Consider including backup or contingent beneficiaries in case your primary beneficiaries predecease you.
4. Failing to insure your spouse
Many people make the mistake of thinking that only primary earners or working spouses need to be insured. They make the mistake of thinking life insurance is all about income replacement. However, take a moment to think about the value of the labor a non-working spouse provides. Does he or she:
Serve as the primary caregiver for children or adults?
Work as the family chauffeur?
Do laundry and maintain the house?
Though this work might not earn income, it is critical to a family’s wellbeing. In the event of your spouse’s death, it’s likely that you would have to take time away from work or pay for these services.
5. Relying only on your employer-provided life insurance
Many workers get group-term life insurance as part of their employee benefits packages. While a term policy is an excellent perk that can help protect your family, the death benefit provided is often small and usually not enough on its own. The coverage will also typically end if you leave the company, leaving your family without that financial cushion. A private policy has the benefit of being portable and completely customized to your needs.
Life insurance is a critical tool in your financial life, and mistakes can be costly. One of the benefits of working with a financial professional is that he or she can review your entire situation and make recommendations about the role life insurance should play. If you have questions about life insurance or want to review your current policies, give our office a call.