Life insurance is a necessity if you want to secure the financial future for your surviving relatives, but it is too often avoided because people are afraid to face their mortality or don’t know how to select the right type of life insurance. Here are five mistakes people make when they choose life insurance and how to avoid making them yourself.
Life Insurance through an Employer
While you may receive a serious discount for signing up for life insurance through your employer, this is actually a very risky strategy for your family. If you are left disabled by an accident, lose your job and then die, your family may not be covered by the employer’s life insurance policy. If you lose your job due to a layoff and then die, you don’t have life insurance. Arrange for life insurance through an insurer of your choice to meet the minimum needs of your family.
Niche Life Insurance Policy
Don’t bother with life insurance that pays out only if you die from a particular cause of death. The odds that you’ll collect on “cancer insurance” or “accidental death insurance” are low; this is why insurers push these particular riders in addition to a standard life insurance policy. Simply sign up for term life insurance that covers your family’s needs in case of your death instead of exotic riders.
Another mistake is signing up for mortgage life insurance, life insurance that pays off your mortgage and only your mortgage if one spouse dies. Dave Ramsey says only to sign up for this if you have a large mortgage and are otherwise uninsurable due to severe health conditions. For everyone else, you want general life insurance the family can use for everything from paying your outstanding medical bills to college costs for your children.
Under-insurance is a common problem when buying life insurance. A general rule of thumb is that your family needs ten times your annual income in life insurance to generate an equivalent stream of income when that money is invested. Another mistake many make is ignoring the need to have life insurance for a stay at home mother, even though the surviving spouse would now be faced with the need to pay for childcare and housekeeping if she dies. Yet another case is not calculating the needs for dependent children, so the $250,000 that covers the costs for a survivor of a couple lacks enough money for the costs of two young children after losing the spouse.
Not Maintaining the Policy
There are several common mistakes when it comes to life insurance policies. The worst is failing to keep up with premiums so that it is no longer in effect. One is failing to review the policy after divorce, remarriage or other changes in one’s family. This sometimes results in an ex-spouse receiving the life insurance proceeds instead of the second wife with young children at home. Review your life insurance policy every few years to ensure that the beneficiaries are the ones you want to receive the money.
A different problem involves losing track of life insurance policies, particularly whole life policies that remain in effect even if you stop paying premiums. Document all of your life insurance policies and place this list including policy numbers somewhere your family will find it.
Plan for the Legal Challenges Life Insurance Creates
While you may want your children to be your beneficiaries, you should consider writing your will to put the insurance proceeds in a trust with a trustee to manage it. This is necessary because minor children cannot manage the money, but they may have need of it before they can claim it. You should also make arrangements so that the life insurance money is managed by a good trustee on behalf of a disabled or retarded individual.
Don’t plan on life insurance through an employer as your main source of life insurance. Don’t sign up for niche life insurance policies that you’re unlikely to collect on. Arrange for sufficient life insurance to cover your family’s needs, and maintain the policy both through payments and beneficiary information. Finally, take the legal steps now so that the life insurance policy money is available to your heirs.