Life Insurance

4 Mistakes to Avoid With Your Life Insurance

4 Mistakes to Avoid With Your Life Insurance

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Life insurance has a number of benefits, but a primary reason to purchase a policy is to help your family financially in the event you pass away. As such, life insurance can be a vital component of the financial plan for you and your loved ones.

Unfortunately, too many life insurance policies are bought without a full understanding of their terms. Oversights can result in people paying more than they should for a policy or buying benefits they don't really need. Worse, of course, is such inattention resulting in too little being left behind for the family, or even none at all.

Here are four all-too-common mistakes to avoid when investing in life insurance:

Underestimating how long you'll live

It's almost paradoxical, but living 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 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 an increase in policyholders living past their life insurance maturity dates. That's because 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. However, it may be difficult or impossible to extend the age of maturity on an existing policy. 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.

When shopping for permanent life insurance--rather than term insurance that expires regardless at a certain age—it's wise to do more than consult the insurers’ actuarial tables. Do some tallying, and possibly 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, death benefits are typically paid directly to your designated beneficiary, without becoming part of your estate. This means 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 died, the payout from the policy will indeed become part of your estate. If so, it may not ever reach your family members as you had intended.

Assuming the insurer and your beneficiaries will be able to find one another

Children sometimes miss out on life insurance payouts simply because their parents never told them there was a policy in place. If children are clueless about a policy's existence, the insurance company is not guaranteed to be able to contact those heirs. It's also not uncommon for families to become embroiled in dispute when a beneficiary is named unclearly. For example, is the "wife" referred to in documents the first wife or the second?

The sad result can be financial benefits that are eaten away, or 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 much effort in searching for your missing relatives or moderating family disputes. 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 them with a copy of your 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 than 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.

Often, you can't wait too long 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 after 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.

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