Many consumers believe term insurance is the best option when considering life insurance. However, this assumption is not always accurate.
It is true that term life insurance, which covers you for a specified amount of time, such as 10, 20, or 30 years, is almost always less expensive than other forms of permanent insurance. The reason is that term insurance only pays out when you die (that is, if you die while the policy is in force), whereas permanent insurance provides coverage for your entire life, assuming premiums are paid when due and may include a cash value component.
To make the best decision, it is crucial that you understand just what you’re buying when you shop for term life insurance. Even an inexpensive policy, if not designed to meet your particular financial needs, can bring money down the drain.
Below are five of the most common and costly mistakes consumers make when buying life insurance.
1. Selecting term insurance based solely on the price tag. Shopping for life insurance only by comparing premiums is asking for trouble. You should compare company ratings to determine financial strength and policy features, such as convertibility options. While the policy’s premium should be considered, ensuring that your policy matches your financial needs is more important.
2. Believing that term insurance is permanent. That’s why it’s called “term” insurance- you buy it for a specified period, most commonly 20 years. This is fine for satisfying temporary needs such as insuring yourself until your mortgage is paid off or funding your children’s college expenses in the event of your premature death.
A 20-year level-term insurance policy you bought when you were 30 would expire when you’re only 50. You may still need to carry insurance at that point, but your age and health conditions might make it impossible or very expensive to do so. If your policy has a convertibility option, you may be able to get coverage, but it may be cost-prohibitive.
3. Buying from an unstable insurance company. Don’t be afraid to ask about an insurance company’s ratings. You can also look online for an insurer’s Standard & Poor’s, Moody’s, or A.M. Best ratings.
Many insurance carriers have high financial ratings (A+ or better), so you shouldn’t have to purchase insurance from a lower-rated company. However, remember that ratings can and will change, so ratings should not be the only consideration.
4. Basing your insurance coverage needs on a pre-determined formula. You may have heard that a good rule of thumb is buying life insurance coverage equal to 10 times your annual salary or 10 times your beneficiary’s financial need. If your surviving beneficiary invests the life insurance proceeds in the stock market (getting an average 10 percent annual return), they’ll have a steady income stream and never need to tap the investment principal.
While this formula isn’t the wrong place to start, everyone has different needs, so don’t assume that ten times your salary is what you need to carry in life insurance. The best advice here is to sit down with a knowledgeable agent who will take the time to learn about your needs.
5. Failing to revisit your policy regularly. Is your former spouse still the beneficiary of your life insurance policy? Did you buy term insurance to cover you while you pay off your mortgage? If you refinanced during the latest rate drop and restarted the clock on your loan, you might also need to update your insurance term. Life definitely has a way of throwing changes your way. Just make sure your life insurance changes along with you.
The bottom line is that it all comes down to doing your homework. Whatever your life insurance needs, we can help you evaluate the best options to protect your family’s financial future.