6 Life Insurance Mistakes That People Make

Buying life insurance can sometimes be very confusing, especially if you don’t know exactly what you are looking for or what the different types of life insurance can offer you. Things get even more confusing when you see how many policies there are to choose from, and how many life insurers there are which supposedly offer you the “best deal”.

You can for example, decide that you want to receive permanent coverage so that your dependents will receive a death benefit whenever you die. But should you choose a whole life, variable life or universal life policy? Some people decide that they would be better off with a term policy, but are then unsure as to whether they should take out an annual renewable term, fixed rate term or decreasing term policy. And how much coverage do you need anyway? And for how long?

If you are new to the area of insurance, finding the answers to these questions isn’t always easy, which, unfortunately, can then result in you making mistakes that are later regretted either by yourself or by your loved ones.

Taking out the wrong policy for example, could result in you paying for more coverage than you need and then struggling to afford to maintain that policy while you are still alive. Or, you could end up not taking out enough coverage, and then having your family struggle financially after your death.

In this article, we are not going to tell you everything that you need to know about life insurance, but instead, we are going to reveal some of the most common mistakes that people make when taking out a term or permanent life policy. If you can avoid making any of the following mistakes, you will stand a much better chance of acquiring the right policy at the right price for both you and your loved ones.

So let’s get started with the number one mistake that people make!

1) Not Learning About Life Insurance

Educating yourself about life insurance is the best way to get the most out of any policy and to avoid making novice mistakes that could cost you money. There are lots of ways that you can learn about life insurance, this website for example, has a whole section on all the different types of insurance that you can take out and is a great way to quickly learn about the important things which you need to know about. You can find the insurance section here.

Another good way to educate yourself is by speaking with friends, family or relatives who have already taken out a policy similar to the one that you are interested in. Not only will you be able to get first hand experience from a source that you know and trust, but you will also be able to learn from their experience and avoid any mistakes which they made. In addition, they will also be able to tell you whether they recommend the insurer they went with, what their rates are like and any insurance agents or brokers who they think are worth going to.

The more information that you can learn about life insurance, the better you will be able to understand what is out there, what is going to give you the best value for your money and what will give you the greatest return on your investment. It will also help you to make sense of what an agent or broker tries to tell you, and so can help you to avoid falling into the trap of taking out more coverage than you needed because a particular agent only had their commission in mind while they were speaking with you.

This is going to take some time and effort, but considering the benefits of getting your policy right and the costs associated with getting it wrong, taking the time to learn about life insurance is definitely worth it especially when your finances and your family are going to be affected by the decisions which you take.

2) Not Being Adequately Insured

Another big mistake that people make when buying life insurance, is not buying enough coverage to adequately cover the expenses of their dependents.There are several reasons for this, although by far the most common is not accurately determining what the expenses of your dependents would be if you were to die unexpectedly.

People forget for example, that their spouse may have to hire help to do the things which you used to do for free, or that life insurance can also be used to cover any major financial obligations that you will have for the next few years such as a home mortgage.

Although it is understandable that people do not want to take out more coverage than they need, the ultimate purpose of having a life insurance policy is to adequately provide for your dependents after you are gone. So if your policy fails in this regard, then you have obviously made a big mistake with the level of coverage that you took out.

To give you a rough idea as to how much life insurance you need, you should be taking out roughly 7-8 times your current income once you have taken inflation into consideration. Of course, the value that you come up with may differ from that just given, but whatever value you decide upon, try to take out slightly more coverage than you think you need just to safeguard yourself against any errors you made in your estimations.

3) Purchasing Separate Insurance Policies

It is generally recommended to purchase as much life insurance coverage as you can in one policy. Not only does this work out cheaper than buying individual policies over time, but it also helps to protect you against coverage gaps which can occur if you have multiple separate policies.

The downside to this of course, is that to buy complete coverage in one policy will initially be more expensive than buying lots of separate policies over time. However, in the long run, buying one policy will work out cheaper than buying many.

Some of the most common types of insurance that people tend to buy separately are:

• Mortgage death insurance
• Credit card insurance
• Credit life insurance
• Supplemental group life insurance
• Accidental death flight insurance

The only time it is advisable to buy such policies separately is if you are in poor health, or close to death, and the policy does not require medical approval. In such cases, it would be in your best interest to buy as your beneficiaries would ultimately gain from you having taken out those policies.

If you do notice coverage gaps in your main policies, such as those for your home, health, car and life, it is usually a good idea to first speak with your insurance adviser/agent to ask if there are any ways that you can close those gaps. This can usually be done simply by extending the type of coverage that your current policy is insuring you for.

If you find that you are unable to close those gaps with your existing policies, you might then want to consider taking out another policy to minimize the financial risk that you and your dependents are exposed to.

4) Insuring For Accidental Death/Travel Accidents

Accidental death and travel accident insurance policies should, in most cases, be avoided. They tend to be quite expensive and only offer you very limited coverage. For example, with such policies you are only insured for accidental death, so if you die of natural causes, then your dependents won’t receive any money at all. As a result, it is far better to take out full life insurance coverage that covers both accidental and natural death.

Generally, if you find yourself buying accidental death/travel insurance, then you probably aren’t sufficiently covered by your existing policy and so would benefit from upgrading the level of coverage that you initially took out.

Although you may be tempted not to upgrade your coverage because taking out accidental death insurance seems like a cheaper option, the fact that it only covers accidental death actually makes it more expensive when you consider that your dependents could end up without any financial compensation should you die from a non-accidental cause.

5) Insuring Your Child Only

It is a natural reaction for any parent to want to protect their child and to ensure that they have money for their education when they grow up.

As a result, some parents choose to buy a cash value policy on their newborn child, but do not take out any life insurance coverage for themselves. From a purely economical point of view this can be very dangerous, because losing a child will have minimal financial consequences on a family compared to if one of the parents were to die.

If you want to insure your child, then make sure that you and your spouse have sufficient coverage first as doing so will provide the greatest amount of benefit.

6) Not Being Able To Afford Your Premiums

Whilst you want to take out as much life insurance coverage as you need to receive adequate coverage from your policy, you must also take into consideration the cost involved and whether you can afford such costs over the coming years.

It is not uncommon for example, for people to commit to a large cash value policy, but then later having to drop it because they couldn’t afford to maintain their coverage alongside their other personal expenses. This mistake tends to be most common with young families who purchased an expensive permanent life insurance policy instead of getting a cheaper reentry fixed rate term policy.

To avoid this mistake happening to you, it is better to take out term life coverage for a period which will cover major life events such as your child going into full-time education or to cover financial obligations such as your mortgage.

Term life insurance will provide you with adequate coverage for your dependents, and will also be a lot cheaper than a whole life policy. You will also have the option to upgrade to a permanent policy at a later date should you desire to do so.