Life insurance is meant to act as protection for your finances and those who remain after you pass away. It’s sometimes used to pay off a mortgage, pay for the funeral service and much more. It’s meant to protect your loved ones.
Buying life insurance is a big investment and it can be a little daunting when you’re trying to buy the right policy. Before you sign on the dotted line and purchase a life insurance policy, be sure to avoid the following common mistakes.
Here are some of the most common mistakes made with life insurance:
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1). Research life insurance policies:
When you’re making such an important decision, it pays to do the research to find the right policy to fit your needs. Life insurance policies come in a wide variety of types to fit different lifestyles, ages, etc. Before making a final decision on any type of life insurance, make sure you completely understand the terms and conditions of the policy.
Here are a couple of examples: level term insurance (also called fixed life cover) pays out the same lump sum over the duration of the policy term. In other words, the payout will stay the same even if the payout comes one year or 30 years later.
Decreasing life cover, reduces the payout each year of the policy. This may be a good option for those who have a mortgage; the payout will decrease as the mortgage balance decreases.
2). Don’t lie to get cheaper insurance:
Some people are tempted to lie about their details when looking to buy life insurance. They may leave out information about being a smoker, or if they’re currently going through medical tests, etc. The issue that you lied may not be found out until later; however, when it is discovered, your life insurance policy could be invalidated, leaving loved ones with no financial protection when you’re gone.
There are better ways to keep your premium more affordable. You can reduce the level of coverage, for instance. The thinking here is that it is better to have a smaller payout, rather than none at all. Even a small payout will help with some of the financial stress your family may experience.
3). Avoid the mortgage myth:
Many people believe that it is necessary to have life insurance coverage in order to take out a mortgage. Some are told that the insurance must be in place before the sale could go ahead, while others are told it was a legal requirement.
These statements are not true when it comes to getting a home mortgage. However, life insurance is a good idea if you’re considering a home. The insurance will provide your loved ones with the financial protection they need to keep the home if anything should happen to you.
4). Don’t assume joint life insurance is cheaper:
This is another myth—that a joint life insurance policy is the cheapest option. While it can be since you’ll both be covered at the same time, it’s not always the best option.
It’s important to understand how joint policies work. They pay out only on the first death. The surviving partner will need to buy a new policy if they have dependents. And consider what would happen if you and your partner decided to split up. Then it will be necessary to compare individual life policies, maybe at a much later age, when most policy premiums become more expensive.
5). Make sure your life insurance is written in trust:
Setting up a trust allows you to leave assets to a named person or persons, including your kids, should you die. Life insurance is classed as an asset and writing the policy in trust provides some benefits for loved ones.
If your life insurance policy is written in trust, it goes directly to the beneficiary. It does not go to your estate. This keeps your life insurance from being included in any inheritance tax calculations. And if life insurance doesn’t go through probate, which can be a long, complex process for your family, with no financial help in the meantime. Writing your policy in trust will ensure the payout reaches your beneficiaries as soon and as smoothly as possible.
Talking about life insurance and financial matters in regard to your passing may be difficult for you and your loved ones. However, this is a conversation that you should have at some point. Not only that but making informed choices about the type and level of coverage you have, will ensure your loved ones are taken care of after you’re gone.
Avoid the myths and be sure to understand the policy you choose. If you have any questions, reach out to a knowledgeable professional who can help you choose the best life insurance policy for your situation.