Purchasing life insurance is far from being the most complicated thing you will do in your lifetime, but you need to do it right in order to make sure that it does not cost you more than it should and that your loved ones will actually receive your death benefit in its entirety and be financially protected after your death. Here are five common insurance mistakes (in no particular order) that people make without realizing how much they cost them, and what you should actually do to avoid these traps:
- Not Purchasing Enough Coverage
The problem: not only not enough Canadians have life insurance, but most of those who do don’t have enough coverage. This situation can be caused by 2 factors : a death benefit that is too small or a term that is too short. In both cases, your beneficiaries can be left to struggle if there is not enough money to cover their needs after your death or if your policy expires before your pass away.
The solution: life insurance policies are customized financial products, so you should not blindly sign at the bottom of the first contract drafted by your insurance company without making sure that the terms are right for you. Generally speaking, if you have dependents, you should purchase a death benefit that is equal to roughly 10-15 times your annual income. We’d recommend even more than that if said dependents will be left saddled with considerable liabilities and expenses upon your death. As for the duration of the term, you should not obsess with that so much, but make sure to renew your current policy before it expires and / or to negotiate better terms if you can.
- Forgetting To Pay Your Premiums On Time
The problem: most life insurance companies do not offer autopay when you are paying your premiums on an annual basis (as you should), which creates the perfect climate to forget to pay your dues on time. The problem is that forgetting to pay your premiums and / or not doing it on time will not simply get you a slap on the wrist, it can void your entire policy after a given grace period, leaving you with no coverage, even in uncertain times like these. You will be forced to fight with your insurer to reinstate your policy or find a new one, but it will be nearly impossible for you to get a deal comparable to the one you just lost, because you will be older than when you signed your previous policy. As you can see below, life insurance can increase fairly quickly as you age.
The solution: As we have mentioned above, most insurance companies give you a grace period (usually 30 days past the due date) to pay your premiums without consequences, so you need to make sure that you send your check early enough for it to reach its destination within that time frame. In extraordinary times like the ones we’re living in right now, if you cannot pay your premiums on time, talk to your insurer and try to work something out with them
- Neglecting To Update Your Policy
The problem: life insurance policies cover long periods of time, and a lot of things can happen in 20, 25 or even 30 years. You can get married, have kids, buy a house and incur significant debts in a lot less time than that, which would completely transform your insurance needs. Not updating your policy to reflect these major changes in your life is a big, big mistake.
The solution: The easiest way to avoid the aforementioned pitfall is to review your policy contract each and every time something major happens in your life. All life events won’t result in automatic policy changes, but it is highly unlikely that you will not need to adjust your death benefit and / or your coverage at least once in 20 years. If not, your beneficiary may have changed. Be careful: if your beneficiary is not around anymore at the time of the payout, your death benefit will be paid to your estate which more often than not is subject to tax laws, so you need to keep that in mind too. Speaking of…
- Naming Your Estate As Your Beneficiary
The problem: some people who already went to the trouble of drafting a will and a testament to manage the distribution of their assets after their death may think it is a good idea to name their estate as the beneficiary of their life insurance policy. That would be a big mistake for several reasons, the main one being that wills are subject to several legal stipulations that life insurance policies are typically exempt of. For example, if you have outstanding debts and liabilities, your creditors will be paid before your beneficiaries see a penny of your death benefit. If it is just enough to cover your debts or even less than that, your loved ones will not receive a dime.
The solution: you really ought to explicitly name your dependents and your loved ones as beneficiaries of your life insurance payout. If they are minors at the time you sign the policy, name their legal guardian to avoid unnecessary legal entanglements should you die before they become adults. And as we stated earlier, if you name older relatives as beneficiaries, just make sure that they outlive you and that they will be around to collect the money when it comes due.
- Not Looking Around For The Best Deal
The problem: life insurance companies are different from one another even though they offer rather similar products, and not shopping around for the best deal you can get can seriously cost you, especially if you sign for a long term — which is often the case. Insurers treat each individual circumstance differently, so it is entirely possible to receive much more favorable terms with one than with another. For example, someone who scuba dives as a hobby could get optimal premiums with Insurance company A but pay significantly more with Insurance Company B that sees this recreational activity as dangerous.
The solution: it is simple, really: look at multiple options to see which insurance companies will give you the best rates after accounting for your particular circumstances. It does not have to be a long, tedious process either: life insurance application can take mere minutes at places like https://emma.ca, for example, so you can get a clear picture of your options in a morning and make the best decision for you in the afternoon!