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4 Life Insurance Mistakes

June 27, 2015

Life insurance should be considered as an essential part of our financial plan. However, we could have found many misunderstanding regarding life insurance. Here are some mistakes that we could make:

  1. Underestimating the amount of claim: Insurance users usually purchase policies based on how much they can afford. One basic rule is that life insurance should provide us with ten times of our annual income. In general, the family could receive six or seven years worth of income, in addition to business capital that is equal to three years of annual income. This will allow the family to get enough time to set up new business or get new jobs. The money should also be able to cover monthly mortgage payments. Suppose, the family has 20 years of mortgage period left, so they should be able to undergo the remaining 13 years with the money they generate from new business or new job. This should also be useful if the family have young children. The surviving spouse will need to generate a lot of debt to raise them. There are other costs that we need to consider such as children education and car maintenance.
  2. Choosing the cheapest coverage: Many consumers choose only the cheapest policies and this could be a serious mistake. In general, cheap policies offer the worst value. We get the least coverage for every dollar we spend on premium. A smart consumer will look for sweet spots, where each dollar they spend could give them the best coverage possible, which is usually can be found somewhere in the middle. Some life insurance providers could offer us very cheap premiums and there’s no guarantee that they will honor the obligation. In this case, we should check reviews on claim settlement to make sure that the company has a reasonable record in settling claims.
  3. Thinking life insurance as an investment plan: It is a common misconception that life insurance is one of the investment options. The misconception is largely caused by agents who promise huge returns after a number of years. However, life insurance plans don’t make sense as a kind of investment, because the return is usually lower than other investment options. As it name implies, life insurance should be seen as a financial protection for the family against the untimely death of the breadwinner. In this case, we shouldn’t allocate our excess money to purchase more comprehensive life insurance plans if we don’t need them.
  4. Withdrawing life insurance policy too soon: It is a bad mistake and can defeat the purpose of having life insurance in the first place. We shouldn’t touch or surrender life insurance policy until we reach the time of unfortunate deaths. This could happen when we meet some urgent financial needs. We should be aware that mortality is beyond our control and that’s the reason we had life insurance policies. As buyers get older, life insurance premiums will be higher, so even if we restart it; we could find that we need to pay higher premiums.
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