Most Common Errors People Make When Buying Life Insurance

Most Common Errors People Make When Buying Life Insurance
Una decisión que te acompañará toda la vida no debe tomarse a la ligera

Purchasing life insurance is an important decision that should not be taken lightly. When you purchase this type of insurance, you are generally signing up for a product that is designed to stay with you for the rest of your life, or, if it is term life insurance, for at least several years. This is why it is essential that you are clear about what your needs are, and most importantly, that you avoid making mistakes when purchasing a policy.

Many people choose the wrong product, and then later find it very difficult to change it, or end up paying long-term consequences for it. To avoid this, take note of the most common errors people make when buying life insurance. Here are some of the main ones:

Waiting Too Long to Get Coverage

One of the biggest mistakes people make in purchasing life insurance is waiting too long to get coverage. Life insurance is the least expensive when the policy holder is younger. This is due to the fact that insurance companies take into consideration your risk of mortality, and statistically, a young person's risk is lower. If you purchase life insurance when you are still young, you are able to get better conditions for your policy, including lower premiums and a higher payout. And, most importantly, it will be easier for you to qualify and have the insurance company underwrite your policy.

In addition, many users make the mistake of thinking in the short-term and fail to clearly see the future. It is common for people to only think of the financial needs we might have 15 or 20 years into the future, but it is much better to think about your family and loved ones' needs in 30 or even 35 years. This will ensure that the policy, and possible payout, will be more adequate.

Having Only the Life Insurance Offered by Your Employer

Some companies offer life insurance plans for their employees, and many people believe that this policy will provide enough coverage. This assumption is false, because these policies don't always offer broad or sufficient coverage. Additionally, they are rarely transferable. This means that if you change jobs, you won't be able to take the policy with you, and you will have to qualify for a new plan, which can be complicated if you leave a job you've had for many years. This is why it is a good idea to purchase a private plan that you can take with you regardless of your career path, even if your current employer also offers life insurance.

Not Researching Enough or Not Asking for Specialized Help Regarding Life Insurance

Many policy holders make the same mistake: they fail to properly inform themselves prior to purchasing a plan. They just accept the first plan they are offered or find, don't compare plans or look for better options, and fail to get enough information about what they are buying.

If you are planning on purchasing life insurance, make sure you do your research on the different kinds that are available. For example, permanent life insurance plans have several modalities, including whole life, universal life, and variable life insurance. Each type also has variations that can make a big difference in how the policy performs, the premiums you pay, the death benefit your beneficiaries will receive or the savings the policy can generate. This is why it is key for you to get as much information as possible, and if you aren't sure you fully understand it, or need further explanations, that you ask an expert. Insurance agents will give you an in-depth explanation of the products available and will help you to choose the policy that is right for you. If you purchase a plan online, remember that you can contact a consultant who will walk you through the process of purchasing the plan. Don't hesitate to ask about all the details, including premium costs, expenses the plan will generate, possible clauses, benefits, and savings components, among others.

Failing to properly inform yourself can cause you to make the biggest mistake of all—purchasing the wrong policy and end up leaving your family under-insured in the event of your death. For example, it's very common for a young person, who still has a relatively small income, to choose a permanent plan, which is more expensive, when they could purchase a term life insurance policy for less money. Later in life, when they are older and have more robust income, they can convert it into a permanent plan and not have to re-qualify.

Making a Decision Based Solely on Premiums

When purchasing a life insurance plan, many people focus too much on the premium amounts they will pay. This can lead to a poor decision, because some plans with very low monthly premiums can hide defects in the insurance plan or company.

In addition, choosing life insurance is part of a long-term plan. A premium that you might consider high today when you are still young might be manageable, or even affordable, in 20 years when you are older and in a better position financially. This is why you shouldn't obsess over the price of current premiums. It's better to remember that the amount will seem like nothing as the years go by, since they are generally stable.

Either way, you can always choose a universal life insurance policy that will allow you to adjust the premiums based on your current financial needs.

"Over-Insuring" or "Under-Insuring"

Related to the above, people also make the mistake of purchasing life insurance that has insufficient coverage and an indemnification or death benefit that is too low. In order to obtain lower premiums, many people purchase a policy with meager indemnifications and poorly planned amounts. In fact, LIMRA, an organization specializing in analyzing the insurance market, reported that in 2016 approximately 48% of homes in the United States had an average coverage deficit of $200,000.

To make sure this doesn't happen to you, you have to decide how much money your family would need to survive without your income over several years. Keep in mind that your policy should cover not only your income, but also be enough to pay for your funeral expenses, the balance of your mortgage, any loans you might have, and your children's school or university tuition. This means that you have to calculate the amount of money your loved ones would need in order to continue in your absence and provide them with an indemnification that will allow them to have financial peace of mind.

On the other hand, you can also make the opposite mistake of purchasing a policy with an excessive indemnification, causing the premium to be too high. People who make this mistake spend much more than they should, allocating money towards their policies that could be better spent on other goods or services. Or, even worse, they might have premiums that are so high that they cannot pay them and end up losing their insurance.

Choosing the Wrong Beneficiaries

Another common mistake is not properly choosing the beneficiaries for your policy. These are the individuals (or institutions) who will collect the death benefit upon the passing of the policy-holder. A common error is not designating alternate beneficiaries. This means that if the designated beneficiaries pass away, there is no one to deliver the indemnity to.

Other times, policy-holders fail to change beneficiaries after a divorce or similar life event, which can cause problems at the time of payment.

Another mistake is to name a minor as beneficiary, because they cannot collect the indemnity until a legal guardian is assigned.

Other times, people name the state they live in as beneficiary. The problem with this is that a long legal process must be completed before the policy-holder's wishes can be honored. In addition, if the policy-holder left any debtors, they can sue the state to collect money owed them, which is not the case for individuals or entities. In these cases, it is better to choose institutions such as NGOs or similar entities to whom the death benefit will be paid.

It is also important to notify the beneficiaries you have chosen that you have designated them. Often, upon the death of a policy-holder, the indemnity goes unclaimed, simply because no one is aware that they are named as the beneficiary on the policy. To ensure this doesn't happen, you should always notify the individuals or entities you have designated to receive the death benefit that you have done so.

As you can see, there are some mistakes that can be made simply due to carelessness or a lack of due diligence. The best way to make sure you avoid these mistakes is to inform yourself as best as possible, carefully analyze the information you collect, and compare all the offers and different kinds of life insurance available. And, when necessary, reach out to an expert.

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