You know that a responsible financial plan includes life insurance if you have dependents relying on your income. A life insurance policy is important if you want to protect your family's financial situation in the event of your death. However, before you commit yourself to a policy, consider these 8 pitfalls associated with life insurance:
1. Getting the Wrong Type of Life Insurance
One of the most important things to understand is that life insurance falls into two main types: term life and whole life. Term life only covers you for a specific time before the policy expires and you are no longer covered. Whole life (in its various incarnations) is meant to cover you throughout your life. As long as you continue to pay premiums, your life is covered.
Each type of life insurance is useful in different circumstances, and in some cases a combination of the two can be beneficial. However, before you choose one or the other, consider your situation and your family's needs. Then, choose the type of life insurance policy that is best in your individual situation.
2. Choosing the Wrong Coverage Amount
When choosing a life insurance policy, you will need to decide how much coverage to get. You might end up with too little coverage - or too much life insurance coverage. Think about how long the coverage will be needed, and how much is needed for your family to get by on if you are no longer able to provide for them because of your death. Also take into account other sources of income your family might have, including passive income or a part-time job held by a spouse.
3. Terms of Coverage
Make sure you understand the terms of your insurance coverage. Some types of death may not be covered, depending on the circumstances. Many insurance policies will not pay death benefits if the insured takes his or her own life. Other policies just won't cover suicide within the first few years of the policy. Be sure to understand what is covered - and when.
4. Missed Premium Payments
You want to ensure that you can make your premium payments when you sign up for life insurance. Indeed, it is usually a good idea to leave leeway for increased premiums. This is because if you miss a premium payment, your coverage can be revoked or suspended. If you are behind on your premiums when you pass on, your family may not get the death benefit. Trying to get your life insurance policy reinstated may come with its own challenges that can cause problems - and could result in a higher premium than your original policy agreement.
Additionally, a missed premium payment can result in reduced death benefits. Even if your beneficiaries still get a payout, it may be less than originally expected. You might need to make "catch up" premium payments in some cases if you want to see the original death benefit restored.
5. Variable Life Premium Increases
While you might see premium increases with other types of life insurance, you are most likely to see them with variable life insurance policies. Those with variable life policies might see premium increases when the market does badly, and the insurance company needs more in order to meet its obligations. For those with variable life policies in a down market, this can be a double whammy since their policy value decreases as market performance suffers. While variable life policies can fit well into some financial plans, it is a good idea to evaluate your variable life policy, and determine whether or not something a little less risky might be in order.
6. Relying Too Much on an Initial Quote
Life insurance quotes can be beneficial as you shop around for the best policy. However, it is important not too rely too much on an initial quote. When you receive a quote, remember that it is made based on basic information that you provide. Many life insurance companies require you to go through a physical exam before issuing the policy and setting the premium. The results of the exam, which usually include a blood workup and urine sample, can mean an adjustment to the quote life insurance premium. Be prepared for the change.
7. Neglecting Your Beneficiaries
When you sign up for life insurance, you name beneficiaries of the policy. Usually, if you have a spouse, you name him or her. Then you have other beneficiaries, including your children or even a charity. However, life changes might get in the way. Divorce, death and other circumstances may mean that the beneficiaries of your life insurance policy should no longer be listed. Periodically review the beneficiaries on your policy and make appropriate changes if warranted. That way, your policy will be up to date, and your wishes carried out. You will have to make sure you understand the terms of your life insurance policy to ensure that you will be able to change your beneficiaries later on.
8. Inadequate Disability Coverage
Some life insurance policies come with disability coverage as well. However, the disability coverage may be significantly less than what you might need. Before agreeing that such a policy is a good deal, it is a good idea to double check the disability portion of your policy. Make sure that it provides enough of an income in the event that you cannot work.
If your life insurance policy does not cover disability, it might be a good idea to look for disability coverage. Many people get life insurance and neglect disability, forgetting that the situation could be quite dire if they are disabled, and have no way of earning income, even though they have adequate life insurance to help their families in death.
Bottom line: Do your homework before getting life insurance. Make sure you really are getting the best policy for your situation.