Purchasing life insurance can yield a number of benefits, but most policies are purchased as a way to help your family financially in the event you pass away. As such, life insurance can be a valuable, if not vital, component of the financial plan for you and your loved ones.
Unfortunately, too many life insurance policies are bought without a sufficiently close examination of their terms. At best, these oversights result in people paying more than they should for a policy, or in buying benefits they don’t really need. Worse, of course, is such inattention resulting in less being left behind for the family, or even none at all.
Here are four all-too-common mistakes that can all-too-easily nullify your investment.
Underestimating how long you’ll live
It’s almost paradoxical, but thriving for longer than you anticipated may actually hurt the life insurance payout to your heirs. That’s because permanent life insurance policies, such as whole life or universal life insurance products, typically come with maturity dates that are tied to your age. When the maturity date is reached, the policy essentially expires and the insurer pays you a certain sum of money. With universal life insurance, for instance, the amount of money paid out is often the policy’s cash value, which can be modest due to slow investment growth or reduced by its use over the years to pay premiums.
With a growing number of people now living into their nineties, there’s been a rise in policyholders who are living past their life insurance maturity dates, since many policies were sold with coverage that ends at age 85. Life insurance is available with a maturity date of as high as age 121, but it may be difficult to impossible to extend an existing policy to an older age, and buying a new policy when you’re in your ninth or tenth decade of living could be prohibitively expensive, if you’re even able to obtain one.
Granted, there’s no foolproof way to anticipate how long you may live, but it’s wise when shopping for permanent life insurance--rather than term insurance that expires regardless at a certain age--to do more than consult the insurers’ actuarial tables. Do some tallying, and possibly even genealogical research, into the ages of your oldest living relatives and your forebears. The incremental cost of extending a policy to a later age may be relatively modest.
Assigning no beneficiary
When you pass away, life insurance death benefits are typically given directly to your designated beneficiary. This means your life insurance benefit doesn’t become part of your estate, and thus creditors can’t come after it to repay any outstanding debts, such as an auto loan or student loan.
However, if you don’t assign a beneficiary, or if your beneficiaries have all died, the payout from the policy will indeed form part of your estate, and so may not reach your family as you had intended.
Assuming the insurer and your beneficiaries will find one another
It’s all too common for children not to receive life insurance payouts because their parents failed to tell them a policy was in place. The children are clueless about the policy’s very existence, and the insurance company is not guaranteed to reach those heirs. It’s not uncommon, too, for families to become embroiled in dispute when a beneficiary is named unclearly (is the “wife” referred to in documents the first wife or the second?). The sad result can be financial benefits that are eaten away, if not fully consumed, by legal fees. The value of unclaimed life insurance policies in the U.S. exceeds $1 billion, according to Consumer Reports.
Life insurance companies typically will not invest a lot of time and effort in finding your relatives or in moderating family disputes, so it’s your responsibility to ensure your paperwork and communications are in order. Name all your beneficiaries explicitly, keep your list of beneficiaries updated, and provide each of those people with a copy of your life insurance policy. Without those steps, your family may not be able to readily make a claim.
Purchasing coverage after you’re ill
While companies may offer life insurance to people with illnesses or medical conditions, the premiums for such policies are typically much higher those you could qualify for without the condition. In addition, the amount of coverage you can purchase is generally capped if you have a pre-existing condition.
Also, you often can’t wait too late in the progression of your condition to buy life insurance. Certain products will not pay a death benefit should you pass away within a certain length of time of purchasing the policy. For example, guaranteed acceptance life insurance policies typically have a two- to three-year waiting period during which, should you die, your beneficiaries would receive not the insured amount, but only what you paid in premiums, plus interest.