Introduction

Buying a life insurance policy can be a sound financial decision that ensures your family is protected after you’re gone. However, life insurance can be complex and comes with many coverage options, making it easy to make mistakes. Here are some common life insurance mistakes and how to avoid them.

1. Waiting Too Long to Get Insurance

Life insurance premiums are primarily based on your age, along with other factors such as your medical history, tobacco use, and weight. The rate you pay generally increases as you get older. If you wait to purchase a policy, you run the risk of developing a health problem before you buy, which may drive up the price you pay or leave you uninsurable.

It’s a good idea to buy life insurance when you’re younger to save on premiums. If cost is a prohibitive factor, consider buying term life insurance, which lasts a set time frame, such as 10 to 30 years. The other main type, permanent life insurance, lasts your entire lifetime and typically costs more.

2. Not Getting Enough Coverage

Life insurance is designed to replace your income and pay for major expenses after you pass away. You want to be sure your policy will do just that. Here are the general steps you can take to figure out how much life insurance you need:

• Add up the financial obligations you want the death benefit to cover. If you have no dependents, you may just need enough for burial expenses, but if you have a family, you need to consider other costs. These may include monthly expenses for a specific time frame, a mortgage, other large debts, and college tuition for your children.
• Subtract any existing assets that can be used toward those expenses. You may decide to lower your death benefit if you have other assets that can replace your income. These may include household savings, college savings, and funeral expense plans.

3. Letting Your Policy Lapse

Life insurance companies typically offer a grace period if you miss a scheduled payment. If you haven’t paid by the end of that grace period, the next steps depend on the type of policy you have:

• Term: The policy will lapse. You’ll no longer be covered, and no death benefit will be paid.
• Permanent: The company may allow you to cash out the permanent policy, use the cash value to cover your premium, agree to a reduced death benefit, or convert to term coverage.

If the insurance provider cancels your coverage, contact them right away and ask what you can do to have the policy reinstated. Some companies allow you to bring the account current within five years of the lapse. You may have to pay penalties or complete a medical examination before the policy can become active again, but premiums for a reinstated policy may be lower than those for a new policy.

4. Getting the Wrong Type of Policy

Life insurance falls into two major categories: term life and permanent life. Each type is designed to meet different financial needs, so it’s important to choose the right one.

Term life insurance remains in force for a specific term, often ranging from one to 30 years, and has the same premium throughout the term. The policy won’t build a cash value, but it will pay a death benefit to your beneficiary if you die within that term. These policies are usually cheaper than permanent life insurance plans.

Permanent life insurance provides lifelong coverage as long as you make premium payments as scheduled. The premium typically doesn’t change, and the policy builds cash value in addition to the death benefit. The cash value provides some flexibility since you can borrow or withdraw from it or use it to add to the final benefit. Because these policies provide guaranteed lifelong coverage, they are usually much more expensive.

A term life insurance policy can be a good option if you’re looking for low-cost coverage for a certain number of years, such as while your kids still depend on you. Some term life policies allow you to convert to a whole policy down the line. On the other hand, you may choose a permanent life policy if you want to build a cash value and want the certainty of lifelong coverage.

5. Choosing the Wrong Beneficiary

Your beneficiary is the person who receives the death benefit on your life insurance policy. This can be one or more individuals (either family members or non-relatives), a trust, a charity, or an estate.

It’s important to name the right beneficiary and know your state laws when setting up your policy. For example, in community property states, your spouse is automatically named your beneficiary, and you’ll need their consent if you want to choose someone else.

If you’re thinking about leaving the policy to your young child, consider naming your spouse or another trusted adult instead. That’s because insurance companies can’t give a death benefit directly to a minor child, so the payout could be delayed while the courts determine guardianship.

Your loved ones may also run into problems if you name your estate as the beneficiary of the life insurance policy. Estates typically go through a probate process if a trust hasn’t been established, and it may take months or years before your beneficiaries receive the benefits. The payout may even be subject to claims from creditors.

Another option is creating a trust for your children and naming the trust as the beneficiary of your policy. You can also specify how you want the money used.

The Bottom Line

You can avoid some of the biggest life insurance mistakes by buying coverage early on, estimating the coverage you need, paying on time, getting the right type of policy for your situation, and choosing beneficiaries carefully.

There are ways to save money when you buy life insurance too. Some states allow insurance companies to use your credit-based insurance score when calculating premiums. If your state allows this practice, then improving your credit before purchasing life insurance could help you score a better rate. You can get a copy of your credit report and check your credit score for free with Experian, then address any issues you find on your report.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand the importance of financial planning and securing your family’s future. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate the complexities of mortgages and find the best solutions for your financial situation.