When most consumers think about buying life insurance these days, they immediately think term insurance is the best option. This is not always the case.
Term life insurance, which covers you for a specified amount of time, such as 10, 20 or 30 years, is almost always cheaper, at least in the short-term, than other forms of permanent insurance. The reason: Term insurance only pays out when you die (that is if you die while the policy is in force), while permanent insurance offers coverage for your entire life provided premiums are paid when due and may also include a cash value component.
As with every important purchase, it's 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 result in money down the drain.
The following are five of the most common mistakes consumers make when buying life insurance.
1. Selecting term insurance solely because it's cheap. Shopping for life insurance by just 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 is certainly a factor, ensuring that your policy matches your financial goals is more important.
2. Not understanding that term insurance is temporary. That's why it's called "term" insurance -- because you buy it for a set period of time, most commonly 20 years. This is fine for a temporary need, 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. At that point, you still might need to carry insurance, but your age and health conditions might make it impossible or very expensive to do so. At least, if your policy has a convertibility option you can get coverage, it just might be down right unaffordable.
3. Buying from a less-than-stable insurance company. Don't be afraid to ask about an insurance company's ratings. You can also look for an insurer's Standard & Poor's, Moody's or A.M. Best ratings on the Internet.
There are many insurance carriers with high financial ratings (A+ or better) so you shouldn't have to buy insurance from a lower rated company. But, keep in mind that ratings can and will change, so ratings alone shouldn't be your only consideration.
4. Buying insurance coverage based on a set formula. You may have heard that a good rule of thumb is to buy life insurance coverage equal to 10 times your annual salary or 10 times your beneficiary's annual financial need. The idea is that 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 a bad place to start, everyone has different needs, so don't assume that 10 times your salary is what you need to carry in life insurance. The best advice here is to sit down with a knowledgeable agent that will take the time to learn about your needs.
5. Failing to regularly review your policy. 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.
Bottom line - don't forget to do your homework. Whatever your life insurance needs may be, we can help you investigate the best options for you to help protect your family's financial future.
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