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Life insurance is a significant financial investment for anyone with assets and beneficiaries. The policy is designed to cushion your loved ones against financial hardship if something were to happen to you. It can give you reassurance that your beneficiaries will be financially secure even when you’re gone.
To be sure, not all life insurance policies are created equal. You’ll want to carefully assess your current lifestyle needs as well as future financial goals before committing to a policy.
In this article, we will elaborate the 6 common mistakes to avoid when choosing a life policy.
Mistake #1: Buying a Policy at an Older Age
The single biggest mistake people commit when buying a life policy is deferring the decision to later years. Oftentimes, people aged 30-35 years don’t see the need to take out a policy with no apparent risk to life.
The truth is there’s never a better time to buy a life policy than when you’re younger and healthier. Insurers view older people as riskier to cover. So the longer you wait to buy your life policy, the more premiums you will pay for the same life insurance coverage.
Besides, the longer you remain unprotected, the more you are putting your family’s financial security in jeopardy. COVID has already shown us that the world is full of uncertainties. So why not buy a life policy now and lock in lower premiums that will save you a possible financial loss in the future?
Mistake #2: Assuming Group Life Insurance Is Enough
A lot of registered companies in the UK offer group life insurance for their employees. But group life insurance is almost always not enough. The basic principle when signing for any type of coverage is being able to cover all the costs of your dependents’ needs.
Unfortunately, group life insurance is pretty basic and usually covers only 1-2x your annual salary. That’s far from adequate! It is recommended you buy a life insurance policy that is at least 8-10x your annual pay.
You can choose a policy that exceeds this limit if you think your loved ones will require more funds after your demise. But settling for anything lower than this amount would be extremely insufficient in the long run.
Mistake #3: Taking the First Life Insurance Policy Available
Doing business with the first insurer you come across is a mistake you must avoid. Instead, shop around and compare the markets. For the most part, life insurance products will vary by the insurer you choose to go with.
For example, some life insurance policies will offer more than just standard coverage. AIG is a good example of a provider that goes beyond the norm. The company offers its AIG Smart Health service which offers added health benefits for the insured and their families.
Moreover, the monthly premiums on a policy will also vary between life insurance companies. There are numerous factors that go into deciding how much premium you will pay, including your age, gender, and health record.
For these reasons, it’s advisable to compare your selections to find the right company that best fits your objectives. And don’t forget to check out the company’s financial strength rating before committing to any deal.
Mistake #4: Buying the Wrong Life Insurance Policy
Different types of life insurance policies are tailored for different needs. It’s important to understand what you are getting in return, as far as coverage goes.
The following are two life insurance policies you might want to consider:
Term Life Insurance
Term life insurance provides coverage for a set period of time, say 10 or 30 years. While it’s the most affordable policy, you’re likely to require a different level of coverage as you transition from one life stage to the next.
Whole of Life Insurance
Whole of Life or permanent life insurance covers you for the rest of your life. It’s a lot more expensive than term life insurance. But on the brighter side, it includes an investment component that gains value over time.
Each of the two policies comes with inherent pros and cons. Make sure you consult an insurance industry expert to determine which one is suitable for your specific needs.
Mistake #5: Purchasing Life Insurance on Mere Recommendations
There is no universal life insurance plan that fulfils different families’ personal and financial needs. Insurers will offer customised plans to meet distinct personal needs and financial requirements. And so, it’s advisable not to make the decision in haste.
Before jumping into a life policy, make sure you understand how it works, its features, returns, risks and limitations. Choosing a life policy on mere recommendations from friends or family is a mistake you should never do.
In most cases, you could end up getting either under-insured or over-insured, which opens up your beneficiaries to financial disaster. It would be best if you defined your plans and goals before choosing a life policy.
Mistake #6: Improper Set Up of Ownership, Nominees and Beneficiaries
The common mistake we see people make when choosing a life policy is not properly setting up the policy ownership, its nominees and beneficiaries. It’s important to list the primary beneficiary alongside a backup or contingent beneficiary for your life insurance policy.
For the policy to achieve its intended objective, pay careful attention to detail. Here are a few questions to ask yourself when setting up your life insurance policy:
- Whose name will the policy bear? Yours? Or a trust?
- Who will be the policy’s beneficiaries (both primary and contingent)?
- Who will you nominate to manage finances after your death?
- Will you include a minor as the beneficiary?
- How many beneficiaries will the policy have?
- How much will each beneficiary receive?
Choosing to buy a life insurance policy is one of the most crucial decisions you will ever make. But these minor mistakes will certainly hurt the people you mean to protect in the first place. So do you relate with one or more of these life policy mistakes? We’d love to hear in the comments below.
