10 Mistakes to Avoid when Buying Life Insurance Policies

Life insurance policies can protect your family from financial risk should you not be around to provide for them. Death benefit payouts will help your loved ones to pay off debts, cover your children’s education needs or pay for daily living expenses. If you’re searching for life insurance, avoid making these common mistakes that could jeopardize your family’s financial security.

Definition of Life Insurance Policy

Defined as a type of insurance policy that guarantees death benefit payouts to beneficiaries, life insurance policies are structured to provide financial relief during challenging times. Death benefits are paid out should the insured pass away and can be used to settle debts or meet other lifestyle obligations.

What is Life Insurance Policy?

A life insurance policy is a contract taken out with an insurance company that commits to paying out a death benefit in return for premiums paid.  

These policies include benefits and features that’ll protect the family from financial hardships in the event of the insured’s death or illness. Non-payment of premiums will result in a policy lapse.

10 Common Mistakes to Avoid When Buying Life Insurance

Purchasing insurance is important for planning your family’s future financial security. However, making the wrong decision could end up putting your family at huge financial risk.

1. Choosing Wrong Type of Life Insurance Policy

If you decide to go with term life, it’s important to remember that death benefits are only paid out if the insured passes away during the policy term. Term life is the simplest form of insurance and doesn’t include a cash value.

A permanent life insurance plan covers the insured for their whole lifetime and some policies accumulate cash value. Your financial goals and budget will help you decide which type you need. Whole life plans are more expensive compared to term plans. However, it does give you some return on your investment. Term life policies are great for covering specific debts such as mortgages.

2. Focusing on Life Insurance Costs

Skimping on life insurance will end up costing loved ones should an unfortunate event result in the insured’s death. Focusing too much on insurance costs could result in you buying a cheaper product with lower premiums. But, this is a major mistake if the reduced coverage isn’t sufficient for meeting your family members’ needs in times of financial distress.

When purchasing life insurance, you want to get the best plan while staying within your budget. However, before picking a cheaper policy, reducing unnecessary expenses could help you afford a better plan for your family.

3. Not Comparing Life Insurance Rates

Shopping for life insurance can be overwhelming with so many different companies offering a variety of plans. It’s important to compare policy rates though to get the best deal and benefits. Exploring the different options is vital if you want to get the best coverage for your family.

Getting quotes from different insurers allows you to review the benefits and features of various plans. Comparing the coverage is essential before deciding which policy is the right one for your family’s future financial needs.

4. Inadequate Term Insurance Coverage Amount

One of the factors determining premium costs is the policy’s face value. The higher it is, the more expensive the insurance plan. Striking a balance between having the right coverage amount and the cost of the plan is tricky if you’re watching your pocket. However, getting inadequate term insurance coverage could put your family at financial risk.

Calculating insurance coverage includes identifying your financial obligations for the future. These could be your home loan, your child’s education or maintaining your family’s current lifestyle. Getting the figures will determine how much coverage is needed in the event of you not being around.

5. Shorter Policy Terms

It’s tempting to opt for life insurance with a shorter policy term because it’s cheaper. However, going for a policy term of 10 to 15years could be a huge mistake that’ll cost your family when left with financial burdens they can’t afford to meet.

Choosing a policy that offers a longer term gives reassurance that loved ones are provided for in the event of the policyholder’s unfortunate demise further down the line.

6. Putting Off Life Insurance

The best time to purchase life insurance is sooner rather than later! The younger you are, the lower the premiums which are calculated based on your age and health. Putting off life insurance until you’re older will result in higher premiums and the risk of not getting a plan because of poor health.

Financial advisors recommend buying this type of insurance as soon as your start earning an income. This way you can get affordable coverage from a younger age while not being affected by lifestyle diseases that could catch up with you when you’re older.

7. Sharing False Medical Information

During the application process, the insurer will ask questions about your health, family medical history, occupation and medication. They’ll get your permission to obtain medical records to verify your answers. You may also be required to take a medical exam.

Hiding information from insurers can result in claims being denied in the event of the insured’s death. Insurance companies may also deny coverage if they find out you’ve withheld information during the application process.

8. Not Purchasing  an Insurance Policy Online

One of the most cost-effective ways of purchasing an insurance policy is doing it online. Many insurance companies offer attractive discounts on policies purchased online. It’s also a convenient way of reviewing the different plans available from the comfort of your home.

9. Forgetting Life Insurance is an Investment

Life insurance plans that include savings and investment opportunities helps to accumulate cash value for later use. Nowadays, these policies come with many benefits that allow you to put together a solid investment plan for securing your family’s financial needs.

Common savings mistake many people make is forgetting that life insurance is an investment. Instead, investing in a plan that invests part of your premium gives you scope for building cash value that could be used as part of your retirement financial strategy.

10. Relying Too Much on Employer-Provided Group Insurance Benefit

Relying too much on employer-provided group insurance benefits could be a big mistake if it doesn’t provide adequate coverage for loved ones. In most cases, the death benefit payout isn’t sufficient for protecting your family members’ financial requirements.

Having your own policy will fill in the gaps missing from your employer’s group insurance plan. It also means you’ve got coverage should you decide to leave your employment.

How to Choose Best Life Insurance Plan

Using our tips below will ensure you buy the best life insurance plan for yourself and your family’s financial security.

Examine Your Age and Dependents

Assessing your age and dependent requirements will help you make the right decision. If you’re the main breadwinner, having whole life insurance could offer better coverage.

Assessment of Current Lifestyle

You want reassurance that your family can maintain the lifestyle they’re accustomed to if you’re not around to provide for them. Assessing your current lifestyle expenses will help you pick the best life insurance plan with adequate coverage for such needs. MetLife’s Income Growth Plan combines life insurance and savings protection for meeting your family’s future lifestyle needs.

Identify Your Income

Identifying your income helps you calculate what premium you can afford without your insurance plan becoming a financial burden. Look for policies that include waiver of contributions which will save you from paying for premiums if your income source stops because of a permanent disability.  

Analyze the Existing Liabilities

Analyzing existing liabilities ensures you pick a policy that provides adequate coverage for repayments of debts and loans without them becoming a financial burden to your family.

Added Insurance Riders to the Plan

Adding insurance riders to the plan enhances the benefits of the policy at a nominal premium rate. These can include Medicare, hospital care, critical care, accidental death benefit, waiver of premium, Accident Indemnity Certificate etc. which provide financial support during difficult times.

Importance of Life Insurance Policies

Life insurance policies are valuable components of financial planning that shouldn’t be ignored if you want to protect your family’s future. Understanding the different types available and avoiding common mistakes before purchasing a plan will ensure you get the best life insurance for your loved one’s future financial well-being.

Frequently Asked Questions (FAQ)

Can you have multiple life insurance policies?

There’s nothing stopping you from having multiple life insurance policies. However, bear in mind this means paying multiple premiums which could be costly in the long run. Keeping up with multiple plans could get complicated and have tax implications as well. Picking an insurance plan with various benefits could be sufficient for your coverage needs instead of purchasing multiple options.

What is the first thing to do before buying life insurance?

Evaluating your financial goals and needs should be the first thing you do before buying life insurance. This way, you can pick a plan that provides adequate coverage in the event of the insured’s untimely passing. Understanding the different types of plans beforehand will also help you make the right decision.

How long does it take to receive life insurance death benefit?

Life insurance death benefit is normally paid out between 14 to 60 days which also depends on the Insurance company. The length of time it takes for a payout is dependent on the circumstances surrounding the insured’s death, the beneficiary’s status as well as the wrong paperwork.

Are life insurance payouts taxed?

According to Bangladeshi tax laws, income from BDT 300,001 is taxable which means a life insurance payout of this amount or higher is taxed. The percentage of tax charged changes as the payout amount increases.

What is the best age to buy life insurance policy?

The best age to buy life insurance policy is as soon as your start earning a salary or have another source of regular income that allows you to pay premiums. The younger you are the lower the cost of buying life insurance.