Choosing the right life insurance policy can seem like a daunting task.
There are so many options available and terms are often confusing and unfamiliar. Even those that do their homework still end up making mistakes from time to time. Whether it’s overlooking important details, not reading the fine print or prioritizing costs over coverage, small errors can result in plenty of regret down the line.
Not Disclosing Pre-Existing Conditions
Before finalizing your policy, insurers usually require a health questionnaire. You need to answer all of these questions honestly. If not, you’ll end up with serious problems down the road.
For those with pre-existing medical conditions, the cost of term life insurance can increase significantly. Because of higher mortality risk, insurers increase premiums to compensate for providing coverage. And if you fail to disclose your condition, the insurance company may deny or void your claim upon learning the truth.
Choosing The Wrong Coverage Amount
Remember, when you’re young and in good health, life insurance is much more affordable. But as you age, premiums can increase substantially. So if you’re thinking about purchasing life insurance, don’t put it off to a later date. For younger readers, opt for a high coverage amount. The additional premiums are small relative to the added benefit granted to your beneficiaries.
To figure out how much, analyze your day-to-day and future expenses. Consider how much your beneficiaries would need to maintain their current lifestyle if you were to pass away. 10 to 12 year’s salary is a great place to start. But also consider your ‘sweat equity’ contributions. They will need to come from another source as well.
Choosing The Wrong Term
For simplicity, most people opt for term life insurance with 10 year periods. The problem with this strategy is renewal costs increase substantially as you age. As the risk of payout increases, insurers charge higher premiums to re-up your coverage. To mitigate this effect, select a term that’s longer than your preferred time horizon. For instance, choosing a 20 or 25-year term ensures your premiums stay constant throughout the entire duration. Because once the term is up, your premiums will increase annually.
Ignoring Volume Discounts
Insurers offer volume discounts when you increase your coverage amount. They often ‘band’ coverage, meaning the cost per $1,000 of coverage declines as you purchase more. For example, a $1 million policy doesn’t cost twice as much as a $500,000 policy. Moreover, situations occur where $300,000 in coverage has a lower premium than $250,000 in coverage. Keep in mind though, insurance brokers are not required to disclose this information. That’s why it’s important to do your homework ahead of time.
Purchasing Mortgage Or Accidental Death Life Insurance
Insurer’s up-sell additional products as a way to extract value from its customers. With mortgage life insurance, the insurer promises to pay off your mortgage if you pass away or are deemed disabled. Coverage varies by policy, so always read the fine print. With accidental death insurance, you’re covered when death or permanent disability occurs from non-health-related issues. But because you’re more likely to die from health-related issues than accidents, accidental life insurance is often unnecessary. Moreover, both options are usually more expensive than standard life insurance policies. And because you can adjust your coverage upward – to cover expenses like your mortgage payments – you really don’t need either.
Purchasing Additional ‘Riders’
In life insurance speak, ‘riders’ are optional features that provide added coverage at an additional cost. For example, a waiver-of-premium rider eliminates your insurance premiums if you become disabled. A disability-income rider requires the insurance company to pay you monthly income if you become disabled and are unable to work. A guaranteed-inseparability rider allows you to purchase additional life insurance at a later date, without the need for future health exams. A term-conversion rider allows you to convert your term life insurance policy to a whole-life policy without requiring any additional health exams.
While these options offer peace of mind, they also come with additional costs. Your premiums will increase substantially and the added coverage usually isn’t worth the excess outflow.
Not Reading The Fine Print
If you’re unfamiliar with insurer’s ‘contest-ability period,’ it occurs during the first two years of your policy. During this period, if you pass away, the insurer can investigate the claim to ensure you didn’t misrepresent anything in your application. If no wrongdoing is found, the insurance company is required to pay the death benefit. However, the process can be quite cumbersome.
Travelers are also affected. Some countries are deemed off-limits by insurance companies and they may void payouts if you pass away in certain regions.
Not Considering Annual Payments
When you select annual payments instead of monthly, you can save a ton of money. Discounts can range from 2% to 8%, but you need to make the payment upfront. However, if you can afford it, paying annually reduces your cost of coverage in the long-run. Insurers offer the deal because annual payments allows them to save on administrative costs and processing fees.
To consider which option is right for you, analyze your monthly budget. You may not be able to make a year’s payments in one lump sum or you may prefer monthly payments because they’re similar to your other expenses. Whatever you decide, just remember that annual payments can save you plenty of money over time.
Forgetting About Whole-Life Insurance
Unlike term life insurance, whole-life insurance doesn’t expire. A payout is guaranteed when you pass away. As well, whole-life insurance adds ‘cash value’ to your policy. Over time, as you continue to pay your premiums, a portion is used to build your cash account. The proceeds are invested and grow tax-deferred. Money in the cash account can be used to pay future premiums or you can borrow against it to cover other expenses. Conversely, term life insurance doesn’t have this option. Your premiums are lower, but no additional funds are invested. With whole-life, the insurer takes care of that for you.
Relying On Your Employer For Coverage
People sometimes think they don’t need life insurance because they have a plan through their employer. However, most employer-plans cover one year’s salary or less. If you have dependents, the payout won’t be enough. A reliable benefit usually amounts to 10 to 12 year’s salary.
Employer-plans also don’t cover additional expenses. Thus, funeral costs and legal fees are the responsibility of your loved ones. Employer-plans can also expire when you leave the company, are laid-off, or switch from full-time to part-time. Solvency is another issue. If your employer goes out of business, your beneficiary may not receive the promised payout.
Last is opportunity cost. If you become sick later in life, you may not qualify for private insurance. If you can’t work, insurers may view you as too risky and refuse to provide coverage. Thus, you’ll be handcuffed trying to find a solution.