Making sure your family is financially protected if something happens to you is one of the most important things you can d0.
That’s where life insurance comes in. But, buying a policy comes with potential pitfalls. Avoid these common mistakes when getting coverage so you don’t inadvertently put your loved ones at financial risk.
1- Don’t Wait Too Long to Get Coverage
Life insurance premiums are based on your age and health status. The older you get, the more you’ll pay for coverage. A 40-year-old may pay double what a 30-year-old pays for the same policy. Pre-existing medical conditions could also make you ineligible to buy life insurance at any price.
The best time to buy life insurance is when you’re young and healthy. This will lock in lower premiums since people in their 20s and 30s are less likely to have health issues that insurers view as risky.
2- Don’t Just Buy the Cheapest Policy
Term life insurance tends to have lower premiums than permanent insurance. But term policies only pay out if you die during the policy term, usually 10 to 30 years. They have no cash value.
Permanent life insurance is meant to cover you for life. It builds up cash value you can borrow against. While term insurance makes sense for temporary needs like covering a mortgage, permanent insurance works better for lifelong income replacement and wealth transfer goals.
Before choosing a policy based only on price, carefully weigh what type and level of coverage aligns with your financial situation and goals. The cheapest policy isn’t the best if it leaves your family under-protected.
3- Don’t Allow Premiums to Lapse
It’s critical to pay your life insurance premiums on time. If you stop paying, your insurer can cancel your policy, leaving your beneficiaries without payouts. This risk is especially acute with permanent life insurance policies that offer guaranteed benefits.
Missing just one payment on a guaranteed universal life policy could void guarantees that premiums will
remain level. Letting such a policy lapse could mean losing lifelong coverage you counted on well before you die. Always pay premiums on time, and contact your insurer before the due date if you may not be able to make a payment.
4- Don’t Borrow Too Much from Cash Value
Permanent life insurance policies allow you to borrow from the built-up cash value. But borrow too much, and you may not have enough left to keep the policy active. This can trigger income taxes on withdrawals that exceed your cost basis. Limit how much you borrow to preserve your policy’s tax benefits and ensure sufficient cash value remains to pay premiums if you become unable to make payments. Also, have a repayment plan so policy loans don’t cut too deeply into cash value.
5- Don’t Forget It’s an Investment
Experts consider permanent life insurance a long-term investment vehicle. Use it strategically by adequately and consistently funding your policy. Pay close attention to performance just as you would other investments. Underperformance could shrink your cash value. Rebalancing periodically realigns your investments with your risk tolerance and time horizon. Don’t just set it and forget it. Actively manage your policy to maximize growth.