6 fatal life insurance mistakes you may already be making

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Life insurance is a complex but important type of insurance coverage. It mainly consists of two types – whole life and term life. Unlike other insurance plans, life insurance pays out only after the death of the covered policyholder. It is therefore vital that you get the right life insurance cover and avoid costly mistakes, as they can be almost impossible to correct by the time the problem is discovered after death.

As Singapore’s life insurance industry sees a sales boom for 2021, Singaporeans are emphasizing and paying more attention to buying life insurance. Are they guilty of making these common life insurance mistakes? Are you one of them?

If you’re currently in the market for life insurance or have recently purchased a policy, read on to make sure you don’t jeopardize your family’s finances by making these mistakes.

Mistake #1: Waiting to buy insurance

It is not uncommon for people to delay purchasing insurance policies. After all, buying life insurance is a complicated matter. It is important to consider the amount of coverage you need as well as the cost. It is certainly not easy to make a decision with the multitude of life insurance options on the market.

However, buying a life insurance policy sooner rather than later can work to your advantage if you are looking to secure a policy at the lowest possible cost.

Life insurance prices tend to increase as people age or as their health deteriorates. In some cases, illnesses or health problems may make you ineligible for coverage. The longer you delay the purchase decision, the more the insurance will cost. Delaying the purchase of a life insurance policy can cost thousands of dollars over a lifetime.

Mistake #2: Buying the cheapest policy

While it’s important to shop for an affordable life insurance policy, the coverage you get in return is also crucial. Life insurance policies can be a bit complicated and it’s a good idea to learn about their features and benefits.

Term life insurance premiums are much less than whole life insurance, and for good reason. Term life insurance only covers you for a certain period of time, while whole life insurance covers you until you die.

If you think you will need life insurance for a certain period of time, buying a term life policy would be best. On the contrary, if you are looking for lifetime coverage or want to own a life insurance policy that builds cash value similar to investments, whole life insurance would be a better choice.

The cheapest policy may not represent the best value. There may be other insurers on the market offering much better coverage at a slightly higher cost. Therefore, it is important to evaluate the value of the life insurance plan you are considering or currently own.

Mistake #3: Not paying premium on time

You are expected to pay a premium in exchange for coverage from your life insurance plans. These premiums are based on your insurance risk class, which takes into account your age, health and more.

Failure to pay a premium can have serious consequences. Instead of a late fee penalty, a missed premium payment can cause your life insurance policy to lapse and you will no longer have life insurance coverage. Depending on your insurer, you may be able to reinstate the policy by paying an additional amount of money.

However, in case you are unable to do so, you will have to look for a new life insurance policy. This can come with its own set of problems. Life insurance gets more expensive with age, and even a few years’ difference can add up to a significant cost increase. Any changes in health can lead to higher premiums or even ineligibility for life insurance. Looking for a new life insurance policy would also cause a gap in coverage and your dependents would not be covered if an accident happens during this period.

Life can also throw some unexpected curves at you; just like recent events with Covid-19. Job loss, business failures or even serious illnesses can hinder your ability to pay your insurance premiums. It is therefore advisable to balance the coverage you need with a premium you can reasonably afford, even when everything is down.

How to avoid it? Pay your premiums on time! Make sure you have enough funds in your bank account if paying via GIRO, or set a monthly/annual payment reminder. You should also consider using different platforms like PolicyPal to track your various insurances.

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Mistake #4: Too little or too much coverage

It’s easy to underestimate/overestimate how much your beneficiaries will need to maintain their current standard of living if something unfortunate happens to you. Too little coverage can have serious consequences for the people you leave behind, and they could face financial hardship as a result. Having too much coverage is also a problem because of the higher premiums charged to your card.

To calculate how much life insurance you need, consider what financial obligations need to be covered: replacing your income, paying off a mortgage or other large debts, and paying for your children’s education. Next, consider what assets you have, such as savings, and whether they can cover these expenses. The difference between your assets and liabilities is the gap that life insurance is meant to fill.

As a rule of thumb, it is recommended that your life insurance cover be at least 10 to 15 times your current income. However, this is only a rough estimate. Depending on your financial situation, this number could be higher or lower.

Mistake #5: Failing to reassess your needs

Most people would have their life insurance policy for quite some time and there will be many changes during that time. Your life insurance needs will differ greatly when you are in your 20s, 40s, and even 60s. These changes in circumstances would mean a need to change your life insurance policies or life insurance beneficiaries.

Determine whether you need more to meet the growing needs of your beneficiaries or less coverage because of the amount of money you’ve accumulated over the years. Carefully consider your budget and needs before purchasing another policy of any kind to ensure you have the insurance you need at the right price.

If there are any changes in your dependents, update your life insurance policy accordingly when those changes occur. This ensures that those who rely on you will not miss out on vital protection should something happen to you.

Mistake #6: Borrowing from your policy

Life insurance policies that accumulate cash value can be a source of funds when you need money. The cash value of a permanent or whole life insurance policy can usually be used for any reason you see fit, including tax-free withdrawals and loans if done correctly. Policy loans are borrowed against a death benefit and the insurer uses the policy as collateral for the loan.

This is a great benefit, but needs to be managed carefully. If you take too much money out of your policy and your policy expires or your money runs out, any earnings you took out will become taxable. Not to mention, you’ll significantly reduce the death benefit available to your beneficiaries.

If you have taken out too much money and your policy is about to expire, you may be able to maintain the policy by making additional premium payments, assuming you can afford them. When accessing the cash value of your life insurance policy, be sure to monitor it closely and consult with your financial advisor to avoid unwanted tax liabilities.

Conclusion

Buying life insurance policies is a complicated thing, but we are here to make it easy for you. Keep these 6 common mistakes in mind before, during, and even after you make your purchase.

Consider buying insurance at an earlier age when it is more affordable. Choose enough coverage at the right price and pay your premiums on time. Reassess your needs from time to time to make sure you have enough coverage. There are no rules that prohibit you from having multiple life insurance coverages, so keep going if the need arises. Avoid borrowing against your life insurance policies and make sure you are able to manage them wisely when you do.

If you’re still not sure what coverage you need, look here for a more personalized quote from our experts.

For more advice on your personal finances, see here!

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The article 6 Fatal Life Insurance Mistakes You May Already Be Making appeared originally on ValueChampion.

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