Life insurance is a form of protection against financial hardship due to premature death, critical illness, and permanent disability. The contract between the policy owner and the insurer guarantees that the insurer pays a sum of money to the named beneficiaries should the unfortunate event happen.
Deciding on a suitable insurance policy can be a difficult process. Furthermore, the cost and availability of insurance depend on a variety of factors such as age, health, etc. Like any other contract, it is important to be well informed before committing.
Here are 7 common pitfalls to avoid when buying life insurance.
#1 Purchasing the wrong type of policy
There are two main categories of life insurance: Term Life and Whole Life and we know it’s difficult to make a choice between them.
Here we must take the chance to stress that there’s no one choice for everyone, and more often there are people who purchase a combination of both plans.
Term Insurance is the simplest and cheapest type of life insurance that provides a payout upon death or disability. As the name suggests, this form of life insurance usually comes with a fixed expiry date ranging from 5 to 40 years.
Term insurance does not provide any cash benefits or payouts if your policy expires before the insured event occurs. This is suitable if you are looking for a low-cost option or a plan for a certain amount of time.
Whole Life Insurance
Whole Life Insurance is a type of permanent life insurance that accumulates cash value. The savings portion of the plan will be paid out at a fixed maturity date with a guaranteed and non-guaranteed portion depending on the policy.
Whole Life Insurance normally covers you up till death unless you stop paying the premiums or surrender the policy. Due to the length and coverage, the premiums of whole life insurance generally cost more than term life insurance.
This plan is useful if you are the primary wage earner in the family, have a child with a lifelong disability or have a significant amount of debt. Getting whole life insurance can help ensure that your loved ones are taken care of financially should anything happen to you.
Make sure you know the difference between these two types of life insurance policies. In addition, consult your financial advisor to determine whether the plan you are looking at is suitable for your future need before making the purchase.
Read more: Whole Life, Term, and Which You Should Get
#2 Buying unnecessary riders
After selecting the type of life insurance, it is possible to add riders to the existing plan. Riders are optional add-ons to insurance policies. By paying a little extra on top of your existing premiums, you are insured for areas that are not covered in your base plan. An example of a rider would be the Total and Permanent Disability protection. This rider provides coverage if you suffer from a permanent injury or illness that makes it difficult to return to work.
However, not all riders are suitable for everyone and may end up being an unnecessary expense. You should review your priorities based on your current needs and only then get the relevant coverage to make sure you get the most out of the added protection.
#3 Using life insurance as a primary investment tool
Another common mistake when purchasing life insurance is treating it as an investment tool just because it comes with an accumulating cash value component. Using whole life insurance as an investment might seem like the best of both worlds since you are getting a return on investment on top of your insurance plan.
However, an insurance plan comes with its associated fees and expensive penalties if cancellations are done prematurely. For most people, buying a base plan and investing the rest into a brokerage account or regular saving plan offers a higher return on investment for your money.
#4 Keeping old medical records to yourself
This mistake is crucial to note since it involves claiming payouts. Insurers have the right to reject claims if they find out that the policyholder did not divulge crucial information during the purchasing of policy. This is true even if the cause of the claim has no correlation with the missing information.
Upon your consent and during a claim, your insurer can request for your medical records via your general practitioner. This information includes any pre-existing medical conditions, family medical history, etc. Previous claims due to medical conditions which are recorded in the insurer’s system can also be referenced during the claim.
Insurers will not unreasonably reject a claim unless there is a piece of important information that was:
- Asked during the application and your answer at that point in time would affect their decision on accepting your claim
- A fact that you should reasonably have known but chose not to disclose
- A fact that the insurers expect you to disclose
Policies come with strict terms and conditions that the insurer would scrutinise when you make a claim to prevent any fraudulent claims. Hence, it will always be better to declare everything up-front and pay a slightly higher premium than to have the claim rejected when you really need it.
#5 Depending on insurance from work
Some employers offer group life insurance as an employee benefit but relying on this alone is a bad idea.
First of all, most group life insurance policies do not provide enough coverage. It is meant to be an additional layer of financial protection instead of being relied on as the main insurance.
Group life insurance is also not “portable”. This means that when you leave your employer, you can’t take it with you to your next job.
Furthermore, you will definitely be older and may even be less healthy when you leave your job. This would mean that it is harder to get an affordable plan on your own. It is recommended that you have sufficient coverage on your own and view your work insurance as an additional layer of benefits.
#6 Incorrect set up of beneficiaries
A beneficiary is a person or entity you name in a life insurance policy who will receive the death benefit.
Setting up beneficiaries is as important as buying the policies itself. The aim of buying life insurance is to protect your family and loved ones. Therefore, going through the proper procedure to name the beneficiaries can ensure that the insurance achieves what it is designed for.
In most cases, children are the main driving factor for one to get life insurance. However, naming a minor child as a beneficiary comes with complications. This is because a minor child cannot directly receive the proceeds of a life insurance policy until he turns 21. If circumstances require you to nominate your minor as a beneficiary, do appoint an executor of will too to ensure the funds are distributed according to your wishes.
#6.5 Make sure you inform someone about your purchase. Buying a policy without telling anyone is a surprisingly common mistake. Therefore, it is important to let your closest ones know so that they know they are covered.
#7 Procrastinate on purchase
Procrastinating on a purchase is one of the key reasons some end up buying an insurance plan with higher premiums. The older you get, the more expensive a life insurance policy becomes. Some insurers may not even offer the contract as they are exposed to higher risk due to underlying health conditions that come with age.
The best time to buy life insurance is when you are young and likely to have fewer health issues. Locking in a lower premium with better coverage will help you save over the long term. Buying earlier on in life will also allow you to make the most out of the policy as time passes.
Read more: When Do You Actually Need to Buy Insurance?
Life insurance isn’t something we think about enough but it is part and parcel of being a responsible adult.
Don’t rush into buying the first plan you come across. We have tons of resources that you can look through and compare for more information on both Term and Whole life policies. Take your time to research before making a decision on which policy suits your lifestyle the best.
Remember, it pays to go the extra mile to understand the pros and cons of each available policy before signing one.