6 Surprising Ways You’re Screwing Up Your Life Insurance

Life insurance—you know it’s an essential component of your safety net. And you want to Protect Yourself, but you don’t know where to start. Or you’ve purchased, but you’re not at all confident you’re set up right to Protect Yourself and your family.

Today, we’re looking at six of the biggest mistakes people make when purchasing life insurance policies. And we’re sharing our top tips for avoiding those pitfalls.

1. Confusing Life Insurance With Investments

If you know you need life insurance and you want to invest for Freedom, you may be tempted to combine those two objectives by selecting a combination product. Specifically, you may consider buying a whole life, universal life or variable universal life insurance policy. Within each of those offerings, you often have the option not only to insure yourself but to invest as well.

But watch out. A combination insurance and investment product muddies two completely separate objectives. Instead of opting for a hybrid product, keep your investments and your life insurance separate. Buy a policy whose sole purpose is to protect your family in the event of your death. And build a portfolio of quality investments outside your insurance.

2. Buying The Wrong Type Of Policy

While we’re on the subject of choosing the right policy, there’s one more important reason to avoid selecting a permanent life insurance product like whole or universal life. Namely it’s this: life insurance should fulfill a temporary need. That’s why a term policy that terminates after a set number of years is the right type of policy to pursue.

Why? Because as you journey to Financial Freedom, you’ll discover at some point you’re able to self-insure. That is, your existing assets and the return on your investments are sufficient to preserve your family’s lifestyle, even if you die unexpectedly. And, at that point, you no longer need to carry life insurance.

3. Choosing The Wrong Policy Term

If life insurance is meant to last only so long, just how long is the right amount of time? A good financial advisor or investment calculator can help you crunch the numbers you need to make that decision.

Again, the key is to have the capability to self-insure before your policy terminates. If you’re committed to Financial Freedom, you’ve likely already calculated your Freedom Date, but do build in a time buffer as a cushion.

What you don’t want is to face a period of time in which your family would need life insurance coverage but be left unprotected because you purchased a policy with too short a term. And buying a second policy at that point would likely subject you to higher premiums as a result of your more advanced age.

4. Messing Up Your Beneficiary Designations

Your life insurance is completely useless if the policy payout does not wind up in the hands of the right people. Most policyholders name a spouse as the primary beneficiary. So, if you get married, widowed, divorced or remarried, take the five minutes necessary to update your policy’s beneficiary designations. Many companies allow you to complete this online via an easy form.

Also, be aware that minors cannot legally receive a life insurance policy distribution directly. So naming your kids as primary or contingent beneficiaries is a mistake that can delay their receipt of the funds. Instead, consider opening a trust and naming the trust as a contingent beneficiary. In the trust, you designate a person who will be responsible for disbursing the payout according to your wishes, in the event that a spouse isn’t around to handle the job.

5. Overpaying For Coverage

Have you ever made a purchase only to find that exact same product priced significantly lower at another retailer? With life insurance, most people shell out a premium for 20 to 30 years before their term policy ends. So it definitely pays to do some comparison shopping before you buy.

Get at least three quotes for the type of policy you want to purchase. Your financial advisor may have some recommendations. Or your home and auto insurance company might offer you special savings if you buy through them. Once you know you’re getting the most bang for your buck, you can purchase with confidence.

6. Not Reading the Fine Print

Few people like reading contracts. But all insurance policies come with their own set of terms, conditions and exclusions. Two policies may seem identical on the surface until you discover that one becomes void if you die as a result of shark attack, flying in a private plane or even war.

In short, you must understand your policy to be sure your family will in fact be protected. If you find the legalese confusing, as many people do, review your policy documents with your insurance broker, financial advisor or lawyer. When you take the time to choose and set up the right policy for your family, you can focus on building your Freedom without worrying about the unknown.

image credit: Bigstock/Kletr

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