By Barbara Marquand | The Associated Press
Life insurance provides a financial safety net for families. Sounds simple, but decisions over whether and how much to buy can get complicated, and mistakes can be costly. Here are common mistakes financial planners see:
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Buying too much or not enough
Not everyone needs life insurance. “If there’s no one else depending on your income, you probably don’t need much or any at all,” says Alyssa Lum, certified financial planner. But those with young children will need a lot. For breadwinners, a rule of thumb is at least seven times your annual salary, plus money to pay off debt and fund college. “Those dollars really add up,” Lum says. Stay-at-home parents don’t need as much, but should have some coverage, says Greg Klingler, a certified financial planner and director of wealth management for the Government Employees’ Benefits Association (US). Buy enough to cover child care and other services that the stay-at-home parent provides.
Buying the wrong policy
There two main types of life insurance: term and permanent.
— Term life insurance is simple, cheap and offers coverage for a certain period, such as 10, 20 or 30 years. It pays out if the policyholder dies during that term.
— Permanent life insurance, such as whole life, lasts your entire life and includes a savings component called cash value, which grows slowly over many years. You can borrow against the cash value or surrender the policy for the cash. It’s more complicated and expensive than term life.
Term life is the best choice for most families, Klingler says, because “most people are going to have a finite need.” Term life can cover you while the kids are growing up or you’re paying off debt, such as a mortgage. Ideally, at the end of the term, you don’t need life insurance anymore.
Permanent life insurance can be an important estate planning tool for those who have a lifelong financial dependent, such as a child with special needs, or whose estate is big enough to incur taxes for heirs.
Putting off the purchase
It’s easier to put off buying life insurance than think about how your death would affect others. “But that’s a pretty risky gamble, especially if you have small kids,” says Michael Kelley, a certified financial planner. Worried about the cost? It might be cheaper than you think. Most consumers overestimate the price of term life insurance by more than three times, according to a 2018 study by industry groups Life Happens and LIMRA. The study was based on a survey of about 2,000 adults who are household financial decision-makers. Compare quotes from at least a few companies to find the best rates.
Relying on free life insurance at work
Life insurance benefits through work probably aren’t enough for those who have a family depending on their income. That coverage is typically one to two times your annual salary — not enough to sustain a family after the loss of a breadwinner. Another drawback: The coverage usually ends when an employee leaves the company. Buy your own policy if you need life insurance, and consider the free benefits from work a bonus.
By Barbara Marquand | The Associated Press | Published on November 1, 2018
NB: This article may have been edited and /or condensed. The information contained is as of date of publication and may be subject to change. These articles are intended as general information only. A licensed advisor should be consulted regarding your specific situation.
