A catastrophic loss can scuttle any financial plan, and bring your savings to its knees. You need insurance to protect yourself against medical costs, sudden loss of life, and loss of property or earning power.
Many people are mostly in the dark when it comes to insurance coverage. They worry that they are underinsured, but they don’t think they can afford additional insurance, or don’t know where to turn for answers to their insurance questions.
Many people don’t trust insurance agents to provide honest information. They think that insurance agents live by the credo: “If you can afford the insurance you have, then you don’t have enough.”
Life insurance is important if your family depends on your earning power for their needs. You will need life insurance to replace your income and provide the benefits your current income now provides, including living expenses, education expenses and retirement benefits.
Life insurance can provide the funds to pay off debts, such as your home mortgage, in the event of your death. It can also provide funds to pay estate taxes and administration costs.
But not everyone needs life insurance. Here are six common life insurance mistakes that people make, spending their hard-earned dollars on unnecessary coverage.
Mistake #1
Buying life insurance if you don’t have dependents. There are very few reasons why you would need insurance coverage if you are single and footloose.
Mistake #2
Buying life insurance on your children. Their deaths would be a tragedy, but you won’t suffer financially if they die.
Mistake #3
Buying mail-order insurance unless you comparison shop for the best rates.
Mistake #4
Buying investment insurance, such as universal life or variable life, instead of contributing to your retirement plans. Retirement plan contributions are tax-deductible, while investment insurance is not.
Mistake #5
Ignoring disability insurance. Disability insurance is vital to your financial health if you or your family depend on your income. And at almost any age, you are five or six times more likely to become disabled than to die.
Mistake #6
Buying expensive riders on your life insurance. Riders, such as waiver of premiums, accidental death benefits, and additional purchase options, are costly and are often not worth the extra money.
This article was excerpted from The Way to Save: A 10-Step Blueprint for Lifetime Security , by Ginita Wall
Thank you for your post. Insurance is a complicated product, with contracts for same or similar products varying widely. I agree that most people do not understand the intricacies of the insurances available to them. However, as a licensed Property, Casualty and Life insurance agent, I do disagree on several points.
I don’t believe that many people distrust insurance agents. There will always be some people who distrust insurance agents, but many of those people also distrust CPA’s, attorneys, and nearly anyone else. And to be honest, there will always be some unscrupulous insurance agents, CPA’s, attorneys, etc. Distrust often stems from lack of knowledge, and fear of being taken advantage of as a result. Since insurance is a complicated product, and people hear conflicting information regarding various insurance products, companies and agencies, it gets very confusing for the consumer. The important point here is that the consumer must gain a basic understanding of the products they wish to purchase and compare prices, so they will know if the insurance policies fit their needs. They also should do their due diligence in comparing and researching the professionals they are considering doing business with.
Mistake #1 – I agree that in many cases, single people without children don’t always need life insurance. However, there are some situations it is recommended.
• If a single person has a student loan, then life insurance is recommended because often these loans are not discharged upon the student’s death. Here is an article about what happens with student loans upon the death of the student:
https://www.studentdebtrelief.us/student-loans/understanding-what-happens-to-student-loans-when-you-die/
• It is also recommended that young people without insurance obtain a small life insurance policy early on. There are many illnesses that a person can develop that will cause them to become ineligible for life insurance when they need it most. Many life insurance policies now offer guaranteed renewal, or guaranteed additional insurance for their policies without requiring an updated medical evaluation. Certainly, health conditions can appear without family history. However, if a person has a family history of certain health problems, it would be wise to obtain a good life insurance policy early on to guarantee coverage. The price for life insurance is also cheaper when you are young and healthy, so it’s best to lock in low rates early.
Mistake #2 – I disagree that purchasing life insurance on your children is a mistake. Here is the question parents must ask themselves.
• Can I afford the $8,000-$15,000 or more funeral and burial cost for my child?
• If my child died, would I be ready to go back to work after a week? After 2 weeks?
• Do I have enough vacation or personal time to take the time I need to grieve, obtain therapy, and recover from the loss of my child?
• If I wanted to take extended time off, do I have the financial means to do so?
Most consumers are simply not able to, or cannot afford to take time off work. A small whole life insurance policy for young children under 16 years old is extremely affordable, can be paid in full in 10 or 20 years, it increases in death benefit over time (or accumulates dividends, whichever you choose), and since it pays death benefits up to age 100 or longer, it can be gifted to your children later. It’s worth it. An alternative would be to add a child rider onto a term insurance policy, also affordable.
Mistake #3 – I agree, buying mail-order insurance is a BIG mistake. Many life insurance carriers offer better insurance policies at better prices. Shop around.
Mistake #4 – I agree. Universal Life and variable life insurance policies are pricey, tricky, and the advisor managing them must ensure they are funded sufficiently. While the returns may be good, the consumer should gain a basic understanding of how they work, and must review them carefully on an annual basis with a knowledgeable advisor. However, funding your retirement plans should be your first priority.
Mistake #5 – I agree, Disability insurance is a must-have.
Mistake #6 – I disagree. Some riders are valuable. You stated that, statistically, we are “five or six times more likely to become disabled than to die.” A waiver of premium rider pays for your life insurance when you are disabled and cannot make your payments, so you won’t lose your life insurance. Like all life insurance premiums, the cost for adding a waiver of premium rider increases with your age at the time of the insurance purchase – all the more reason to obtain life insurance while you are young and healthy. In addition, it is very affordable to add riders to term policies for insurance on your children.
Well said! Thanks for your thoughtful post.
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