There are many good reasons to consider buying a life insurance policy, such as a recent marriage, a new baby, or taking on a large debt (like a house) loved ones would have trouble paying off if something happened to you. Or perhaps you have witnessed first-hand the impact that a death has on surviving family members’ finances.
If you’re in the market for life insurance or have recently bought a policy, make sure you don’t put your family’s finances in jeopardy by making these mistakes.
Mistake 1: Waiting to Buy Insurance
When purchasing life insurance, it’s important to consider the amount of coverage you need as well as the cost. Life insurance premiums are based on a number of factors, including your age and overall health.
Buying a life insurance policy sooner, rather than later, can work in your favor if you’re hoping to secure a policy at the lowest possible cost. Life insurance rates generally increase as people age or their health deteriorates. And, in some cases, illnesses or health problems may make you ineligible for coverage. The longer you put off the buying decision the more the insurance will probably cost—if you can buy it at all.
Mistake #2: Buying the Cheapest Policy
While it is important to shop for a policy that’s affordably priced, it’s important to consider what you’re getting in return, in terms of coverage. Life insurance policies can be a bit complicated, so it’s a good idea to learn about their features and benefits.
For example, term life insurance tends to be cheaper than permanent life insurance. But there’s a caveat: term life insurance only covers you for a set time period while permanent life insurance can cover you until death, as long as your premiums are paid.
If you believe you’ll only need life insurance for a set period, say 20 or 30 years, then a term life policy can be an affordable option. On the other hand, if you’re interested in lifetime coverage or you want to own a life insurance policy that builds cash value as an investment vehicle, then it could be worth it to pay more in premiums for permanent coverage. Try comparing the quotes of different life insurance policies to determine what you might be giving up in exchange for a cheaper deal.
Mistake #3: Allowing Premiums to Lapse
When purchasing life insurance, you’re expected to pay a premium in return for coverage. Again, these premiums can be based on your insurance risk class, which correlates to your age, health, and other factors. If you’re considering buying a universal life policy with secondary guarantees—low-premium guaranteed death benefits for life or for a specified period of time—a late payment can impact the policy benefits.
Universal life is a special type of permanent policy that has been marketed as having long-term guaranteed protection at the lowest possible rate—it is very different from term insurance. While many of these types of policies have a cash surrender value, universal life with secondary guarantees focuses on maximizing the amount of insurance available per dollar of premium.
Some of these policies can be sensitive to the timing of premium payments. For example, if you happen to miss a monthly payment—or are more than a month late sending in your check—your guaranteed policy may no longer be guaranteed. A policy purchased with guaranteed coverage to age 100 might only provide protection to age 92 if one payment is late or missed, which could be problematic if you live longer.
Mistake #4: Forgetting Insurance Is an Investment
The Financial Industry Regulatory Authority (FINRA) considers a variable life insurance policy an investment, so it is important for you to treat it as one too.
A variable life insurance policy is a permanent type of policy that provides life insurance protection with cash value. Part of the premium goes toward life insurance, and part goes into a cash-value account that is invested in various investments similar to mutual funds that you choose. Like mutual funds, the value of these accounts fluctuates and is based on the performance of the underlying investments. People often look to these policy values in the future as a source of funds to supplement their retirement income.
You must fund a variable life policy sufficiently to maximize its cash value growth. This means continuing to make adequate premium payments, especially during times of poor investment returns. Paying less than originally planned can have a big impact on the cash value available to you in the future. It’s also important to monitor your policy’s performance and periodically rebalance your accounts to your desired allocation, just as you would with any investment account. This will help ensure you’re not taking on more risk than you had planned when you set up your account.
Mistake #5: Borrowing From Your Policy
Permanent life insurance policies that accumulate cash value could be a source of funds when you need to borrow money. The cash value of a permanent policy can generally be used for any reason you see fit, including tax-free withdrawals and loans, if done properly.
This is a great benefit, but it must be carefully managed. If you take too much money out of your policy and your policy lapses, or runs out of money, all the gains you’ve taken out will become taxable. Not to mention, you may significantly reduce the death benefit that’s available to your beneficiaries when you pass away.
If you have taken too much money out and your policy is about to lapse, you may be able to maintain the policy by making additional premium payments, assuming you can afford them. When accessing your life insurance policy’s cash value, be sure to monitor it closely and consult your tax advisor to avoid any unwanted tax liability.
To learn more about getting the right coverage for your needs, give the Nickerson Insurance Agency a call today!
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