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Life insurance is an important purchase, and consumers buying a policy don't want to make mistakes that end up adversely affecting the financial security of their loved ones after an untimely death.
Unfortunately, many people make costly errors when it comes to securing life insurance coverage. Knowing about some common mistakes can make it easier to avoid them. Here are four errors many people make that it's possible to steer clear of with a little advanced knowledge.
1. Waiting too long to buy coverage
Delaying the purchase of life insurance is an especially common mistake -- one that could come at a huge cost.
Individuals who don't yet have dependents may assume they can wait to buy coverage until they get married or have children. But, buying a policy while young and healthy can be cheaper and easier.
By delaying the purchase of life insurance until later on in life, it's possible a pre-existing condition will develop that makes standard policies unattainable. Premiums will also be higher if a policy is purchased at an older age, or after a medical condition has developed. As a result, those who expect to have dependents in the future may wish to buy coverage ASAP to get the most affordable policy and eliminate the risk of leaving future dependents unprotected.
2. Buying the wrong type of insurance
Buying the wrong kind of insurance is another costly error. For example, some consumers may assume whole life coverage is right for them because they want to have protection in place forever. For most people, though, term life policies are a better deal. Term life policies are in effect for a limited time -- such as 20 or 30 years -- and the death benefit is paid only if the policyholder dies during the term. By contrast, whole life policies stay in effect for as long as premiums are paid, so a death benefit is always paid out.
Lifetime coverage from whole life insurance isn't really needed in most situations though. That's because, in most cases, people are only dependent on the policyholder's income or services for a limited period of time. Whole life policies are much more expensive than term life coverage, and there's little reason to pay more for this added protection.
3. Buying the wrong amount of coverage
Consumers buying life insurance could also end up with the wrong amount of coverage. This could happen if a person buys too little protection because they forget to consider issues such as the debt they owe or their child's education. But it could also be a mistake to buy too much coverage, as this makes insurance more expensive than needed.
The goal of life insurance isn't to leave surviving family members rich, but to make sure their needs are met. To determine how much coverage to buy, it's helpful to follow the DIME formula. This stands for debt, income, mortgage, and education. It means consumers should get a policy with a death benefit large enough to repay outstanding debt, replace their income for the required number of years, repay their mortgage, and cover their child's education.
4. Making the wrong choices about your beneficiaries
Finally, it's important to choose beneficiaries carefully as these are the individuals who will receive the death benefit.
Typically, it's best to name individuals to inherit rather than having the life insurance policy become part of the policyholder's estate. Beneficiaries will get the money tax free and it won't become part of the probate estate, so it won't have to transfer through the probate court process and potentially be subject to estate taxes with larger estates.
It's also a good idea to name a contingent beneficiary, which is a person who will inherit if the primary beneficiary passes away before the policyholder. Forgetting to name a contingent beneficiary could be a big mistake, because if the primary beneficiary has died first, then the life insurance policy will become part of the estate and have to pass through probate.
By avoiding these four big errors, consumers can make sure they have the right life insurance so their surviving family members get the protection they deserve.
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