Biggest Life Insurance MistakesSubmitted by Eric Nichols, ChFC, AIF® | United Planners Financial Service on March 26th, 2015
For most people, buying life insurance is difficult enough even when it’s done right. But when it is done with only one eye open, or haphazardly just to get it over with, mistakes are very common, and they can be very expensive. Without question life insurance is one of the most important purchases people make in their lifetimes, yet many people are ill-equipped to make the critical decisions in the process that will produce a satisfying result. Consequently, many life insurance owners express doubt, or even remorse, over their purchase. By avoiding some of the biggest mistakes that people make when buying life insurance, you can be more assured of your purchase and enjoy the peace-of-mind it is expected to bring.
Mistake #1 – Failing to Recognize the Real Reason for Life Insurance
You know you need life insurance, but do you understand your real reason for owning it? Yes, it will pay off your family’s debt, and provide for a college education for your children. And, it will be a much needed source of income for your spouse when your income stops. Those are the practical needs for life insurance, which, as discussed in the next section, are vitally important to the buying process. But, unless the purpose of life insurance is understood at an emotional level, it will remain in your mind as a “need-to-have” as opposed to a “must have” which makes it somewhat expendable.
From your family’s perspective, the purchase of life insurance is one of the most unselfish acts of love and devotion to your family you could ever commit. While they may not recognize it in that way while you’re alive, it will be the way they remember you if the unthinkable happens. For you, there is nothing you can buy that will give you the sense of satisfaction and the absolute peace-of-mind knowing that your family will not want for the things they need to live the life you envision for them. Those are the real reasons for life insurance.
Mistake #2 – Not Buying the Right Amount
One of the worst feelings is to wander through life wondering if you own enough life insurance, or worse, wondering if you own too much. In either case, you wind up second-guessing your purchase because you don’t know if it will do enough, or, you are concerned that you’re paying more than necessary to protect your family. Why guess at the amount you need when you calculate, with much more certainty, the amount you really want?
Determining your need for life insurance is not an art – it is a mathematical science based on known facts and hypothesis to arrive at solid solution. The facts are clear. Your family has a specific amount of debt that needs to be repaid. You have certain obligations such as ensuring your children will have educational opportunities. Your family will have specific income requirements for be able to maintain their lifestyle. You currently have a specific amount of assets that are available and your family may have other sources of income that will be available to them after your death. Those are the facts.
Next, you hypothesize about the future so that you can apply some assumptions, such as the increase in the cost-of-living over time and the growth rate on capital including the proceeds from life insurance. This will enable you to calculate how long your assets and life insurance proceeds will last.
You can make some assumptions as well about how long the need for life insurance will last. For instance, once your children have graduated from college they should no longer be dependent on your family’s income. If you have children with special needs, however, their dependency may last a while longer. You can also assume that your spouse can eventually replace your lost income with his or her own earnings, however, it is important to account for a spouse who may not have the earning capacity to do so.
Using this practical planning approach, the amount of life insurance you will want to own will be based on a real life look into the future with actual facts (your current situation) and honest assumptions (inflation, growth rate and needs assumptions) so you will know it is the right amount.
Mistake #3 – Buying the Wrong Kind of Policy
With life insurance you have many choices which can work to your favor if you recognize the importance of matching the type of policy to your specific needs and wants. The mistake many people make is to follow the advice of someone who knows little or nothing about their situation. You might read an article about why everyone should just buy term life insurance because it is the cheapest. Or, you might get an earful from a colleague who is raving about his variable life insurance plan. Your life insurance solution should stand on its own based on your needs, preferences and priorities.
Term life is an excellent choice for people are prescient enough to know when their need for life insurance will cease to exist. For people who are a financial track that will ensure that they will accumulate enough of their own assets, the need for life insurance may diminish over time. A tragic mistake that some people make is buying term because it can save some money currently only to find that their need for protection continues. They could find themselves in a situation where they need to repurchase some life insurance, but they can’t get it because they aren’t insurable or because it too expensive.
Permanent life insurance is not for everyone as well as it is a more expensive solution in the beginning. But, for people who recognize that their need for protection is likely to continue beyond 15, 20 or even 30 years, it can be a much more cost-effective way to own life insurance for the long term. The cash value growth in permanent policies is not only way to accumulate savings, it can be applied to pay for the premiums at some point so the policy becomes self perpetuating for life. The same life insurance you bought to protect your young family will remain available protect a family business, or supplement your spouse’s income, protect your surviving spouse’s retirement income against investment losses, or protect the value of your estate from taxes and settlement costs.
There are many different types of permanent life insurance plans, such as whole life, variable life, universal life, variable-universal life. Each has features and characteristics that can benefit people in different situations. It would be well worth your while to study each of them with the guidance of an independent life insurance professional to determine which would be the best match for you.