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Life insurance: it’s one of those things you may not think about until you have a family that depends on you. Unlike estate planning, which can require some difficult decisions (Who will be your child’s guardian? What are your wishes around end-of-life care?), purchasing life insurance is relatively easy. You find an agent, purchase a policy, and tuck it in your desk drawer. You can even buy life insurance online. Or if you’re employed, maybe you already have a life insurance policy through your job, so you’re all set—or are you? Read on to see if you’re making one of the common life insurance mistakes that can seriously affect the security of your family.
Life Insurance Mistake #1: Not Having Life Insurance at All
Yes, getting life insurance is relatively easy. That doesn’t mean that everyone who should have it, does. The 2018 Insurance Barometer Study, by Life Happens and LIMRA (Life Insurance Marketing and Research Association), shows that 84% of Americans believe most people need life insurance. Only 68% say they personally need it, and only about 59% actually own some type of life insurance policy.
Why don’t more people have life insurance? Possibly for the same reasons that people put off estate planning: it requires them to think about their own mortality, or the need for coverage at some point in the future takes a backseat to the urgent demands of daily life.
Life Insurance Mistake #2: Believing Employer-Provided Insurance is Enough
Some employers offer life insurance to their employees, and it’s a nice perk of employment. The problem with employer-provided insurance is that it can lull you into a false sense of security, and make you believe that whatever benefits your family would receive through that policy are enough. In fact, this is rarely the case.
If you’re single, without a mortgage, kids, or other dependents, you might be able to get by with employer-provided insurance. Otherwise, chances are your family will need more. Most employer plans provide less than $100,000 of coverage—far less than most young families need, especially after paying off final expenses.
Life Insurance Mistake #3: Not Having Enough Coverage
How do you know how much life insurance to get? You should have enough to cover your LIFE: Liabilities (like mortgage, car payments, credit card debt), Income needs for your family, Final expenses, and Education for your children. The Life Happens and LIMRA study referenced above indicates that one third of families would feel the financial impact of losing a primary wage-earner in less than a month. A family that is still grieving shouldn’t be burdened with financial worries, too.
Life Insurance Mistake #4: Having the Wrong Kind of Coverage.
All life insurance is not created equal. Term life insurance and permanent (also called whole life) insurance offer different benefits. Consider your needs.
All life insurance is not created equal. Term life insurance and permanent (also called whole life) insurance offer different benefits. Consider your needs. Are you looking for a policy that will help cover a mortgage and your family’s needs while your kids are young, your debt is high, and your spouse is out of the workforce caring form the family? Are you looking to accumulate cash value in a policy? Does it matter to you whether your premiums increase or not? An insurance professional can help you take stock of your needs and decide whether a term or permanent policy is best for your purposes.
Life Insurance Mistake #5: Failing to Name or Update Beneficiaries
Once you purchase a life insurance policy, or have one provided to you by your employer, the tendency is to put it in your desk drawer and forget about it. But that could be a serious mistake. At least annually, if not more often, you should make sure that the people you intend to benefit from the policy are the named beneficiaries (unless they are minors). Your intended beneficiaries may stay the same for decades, but if there is a change, failing to update could devastate your family. If you get a divorce, remarry, or undergo another major life change, don’t wait to update your beneficiaries.
Life Insurance Mistake #6: Thinking Your Life Insurance Needs Won’t Change
Just as you should regularly make sure your named beneficiaries are those you intend, you should also review your policy to be certain that the needs it was originally intended to meet are still applicable. The term policy you bought when your kids were young and your mortgage wasn’t paid off may not be right for you 20 years later. Talk to your insurance professional or financial professional to see what might be a better fit for you now.
Life Insurance Mistake #7: Not Using Your Life Insurance to its Full Potential
Most people purchase life insurance to provide for their families or leave something behind for their heirs. But life insurance can be used for so much more. Life insurance can be used to leave a legacy, such as providing significant support to a charity that is important to you. It can protect your assets in the event you need long-term medical care or have other significant expenses.
If you own a business or farm, life insurance can make it easier to transfer those assets without burdening your heirs, by providing liquid assets that may be needed, avoiding the need to sell off business assets to cover expenses. And if you have one heir who wants to take over the business, and others who don’t, life insurance can be used to make sure the heirs who don’t take the business receive an equivalent amount.
If you are making any of these common life insurance mistakes, it’s time to talk to your estate planning attorney or financial professional so that you can get the most out of your life insurance policy. We invite you to contact our law office to schedule a consultation.