Life insurance can be a critical piece of your financial picture. The death benefit can protect loved ones if you pass away by replacing your income and helping them with debts. It can also help with building wealth and estate planning.
There are many policy types, features, and terminology in the life insurance space. Such complexity can cause policyholders to make costly mistakes if they’re not careful. To help you avoid errors and find the right policy for your needs, this article will dive into four mistakes you should avoid when choosing a life insurance policy.
1. Underestimating your life insurance needs
Underestimating your life insurance coverage needs could leave your loved ones without enough to be financially secure if you pass away. If you get a traditional term or permanent life insurance policy, a good rule of thumb is to get a death benefit equal to at least 10 times your annual salary. So, if you earn $60,000 per year, you should consider a $600,000 death benefit.
That said, your current lifestyle, family size, and other factors play a role in getting enough coverage. If you have a larger family, your partner may need more support to raise your children and pay for their future college education. On the other hand, if you have no children, a smaller death benefit could suffice.
You may also be wondering, “Is life insurance taxable?” and whether you should keep this in mind when deciding how much coverage you need. Luckily, life insurance proceeds generally aren’t taxable, meaning your loved ones won’t have to worry about paying taxes on the payout they receive.
2. Getting the wrong policy type
There are several types of life insurance policies with different levels of premiums, coverage amounts, and other features. Term life insurance policies offer substantial death benefits for lower premiums, but they expire after 10 to 30 years, depending on your chosen policy term. This means you must renew or get a new policy to continue coverage.
Permanent life policies cost more for the same coverage, but last for life. They also offer wealth-building through the cash value growth component, which grows tax-deferred at a specific rate depending on the policy type. You can withdraw or borrow from it when large enough or receive the full cash value minus surrender charges if you surrender the policy.
Finally, there are small permanent life policies designed for easy approval and specific purposes. For example, guaranteed issue life insurance skips the medical exam, doesn’t deny applicants, and offers inexpensive premiums and low cash value. But keep in mind that this policy typically comes with a small death benefit.
Final expense insurance is a similar but slightly larger policy type designed for end-of-life costs, like funerals and medical bills. It also has low premiums, a small death benefit, cash value, and no medical exam.
3. Not exploring riders
Riders include options you can add to a life insurance policy to customize coverage. Some are free, while others require you to pay more in premiums. For example, inflation riders help you maintain the value of your death benefit in times of high inflation. They increase your death benefit by 3% to 5% each year, reducing the effect of inflation on your coverage. In times of low inflation, these riders help you grow your death benefit.
4. Not shopping around
It can be easy to pick the first policy you find to get the life insurance process over with. However, this can cost you higher premiums, a lower death benefit, or features you miss out on.
So instead, it’s wise to shop around with several insurers. This will help you compare quotes against each other to see what policy offers all the coverage and riders you need at the lowest possible rate. You can shop around at individual websites or use an online marketplace website, which asks for several pieces of information from you, then pulls in the best quotes from around the web to save you time.
The bottom line
Life insurance can be a vital investment in your and your loved ones’ financial security. So, it’s critical to be informed about life insurance and watch out for common pitfalls.
Avoid underestimating your coverage needs. Aim for at least 10 times your annual salary, but also account for living expenses and family size. At the same time, make sure you select the right policy for your needs and don’t skip over considering riders.
After outlining everything you need from a life insurance policy, don’t go with the first quote you get. Shop for multiple quotes to get the lowest possible premiums on the life insurance you need. Knowing and avoiding these mistakes will save you money on life insurance while ensuring your loved ones are fully protected.