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5 Common Life Insurance Blunders To Avoid
For most people, life insurance represents a key ingredient of their overall financial plan. If the unthinkable happens, your spouse or partner, and dependents are insulated from the turmoil of fending for themselves while coping with your absence. Given this, it is surprising that a large number of people either have an inadequate amount of coverage or worse, none at all.
In most cases, such circumstances are due to a gross misunderstanding regarding the value of life insurance and the manner in which future needs are calculated. Sadly, the mistakes most consumers make when investing in coverage exposes their loved ones to unnecessary risk. Below, we'll describe the 5 most common life insurance blunders and offer suggestions that will help you avoid them.
#1 - Having Less Coverage Than Needed
A lot of people who currently have life insurance have less than their families need. The problem is, very few people realize a shortfall exists; as a result, it remains unresolved. One of the reasons this happens is due to a misconception regarding why coverage is necessary in the first place.
Many consumers feel life insurance is needed only to pay bills and cover expenses associated with funeral arrangements. In reality, a family's needs usually extend much further. Avoid falling into this trap by taking the time to clearly define the financial obligations your family will face in your absence.
#2 - Using Outdated Formulas To Calculate Need
There was a time when many people - including life insurance agents - calculated the level of coverage needed by using the simplest of formulas: a multiple of salary. That is not an appropriate gauge for your family's future needs. Indeed, there is a high likelihood that using such a formula will leave them exposed financially.
Consider your current and future obligations as well as those of your loved ones. For example, do you have a child for whom you'll need to pay for college? What is the outstanding balance on your mortgage? Do you have outstanding debts that must be paid? These and many other factors should be considered when calculating the amount of life insurance coverage you need to purchase.
#3 - Only Considering Lost Salary
Your salary is probably the largest contribution to replace in the event you pass away. But, there are other financial components that must be taken into account. For example, suppose your employer provides a level of health care coverage for you and your family. Would that coverage evaporate if you pass away? If so, your spouse or partner may need a financial buffer that offers protection from expenses related to their future health care needs. This is also true with other types of benefits that your employer might provide.
#4 - Trying To Avoid The "Unnecessary" Expense
Because having life insurance coverage is not mandatory, many people consider it an optional expense. When times are tough and funds are in short supply, it is often one of the items earmarked for the chopping block.
This too, is largely a result of a common misunderstanding about life insurance policies. Many consumers opt for an expensive whole life package without realizing that term life insurance is far more affordable. Moreover, additional savings can be realized by purchasing a joint term policy for you and your spouse.
#5 - Assuming All Policies Are Priced Similarly
One of the most pervasive fallacies is that all life insurance policies are priced using the same formula. In actual fact, they're not. You'll find that premiums for the same level of coverage will vary across insurers. What's more, the difference in life insurance rates is often dramatic, similar to auto insurance, travel insurance, and motorcycle insurance. The best way to find an affordable insurance policy for you and your family is to compare rates online. By evaluating multiple companies side by side, you'll be able to make an objective choice that best suits your personal circumstances.
Protecting your family's financial future in the wake of your untimely passing is critical. The few minutes you spend shopping for the right insurance policy today can yield a lifetime of security.