Life Insurance Mistakes to Avoid in Your 20’S and 30’S
Among the most important decisions to make in your younger years, getting life insurance is critical to a strong financial future for your family. By making the right choices about your life insurance options while you are young, you could save a lot of money and increase your household’s financial stability after you’re gone. Misunderstandings and assumptions about how life insurance works and how to make the most of it can lead to mistakes we should avoid.
Here are some of the most common life insurance mistakes to avoid in your 20s and 30s:
When you are young and healthy, chances are good that your life insurance policy will cost much less. With life insurance, the earlier you start, the better. A life insurance policy is only useful if it is purchased before it is needed. Procrastinating brings risks, while getting a policy early on can protect your family’s financial future and lower your risks.
A cheaper life insurance plan is better than none. If you can’t afford the plan you need, get a cheaper one that will, at least, offer you a margin of cover. You can later adjust your cover amount as soon as you can afford it. Choose a plan that allows you to adjust your cover and premiums.
2. Getting the Wrong Type.
Many young adults looking to secure their financial future tend to focus solely on life insurance.
This is a mistake because death is not your only or even biggest risk. Think of risks such as critical illness or disability. Many insurance providers offer policies that cover multiple aspects of risk. These combined policies can give you insurance that goes beyond mere life insurance cover to protect against sudden accidents, critical illnesses, dread diseases, and disability.
Your life insurance could also include additional cover for critical illness, disability, and more. It’s wise to compare quotes for your different options to see which policy will best cover your biggest risks over and above death.
3. Choosing the Cheapest Policy.
Cheap doesn’t mean best. There are other factors to consider when buying life insurance. You’ll want an insurer that is reliable and known for paying out claims timeously. Look for an insurance provider with the reputation and backing to prove they will be able to pay out when the time comes. Some insurers can take a very long time to pay out after a claim is made. This is not a desirable situation for family and loved ones at a time of loss.
Compare statistics from different insurance companies like their settlement ratio for death claims and the duration period of these settlements as an average. Choose the insurance provider best able to fulfill their obligations to you, the insured. You can also check sites like hellopeter.com for customer reviews about each company’s settlement procedures and read their experiences before you decide.
4. Ignoring Discounts.
You may think being insured for a lower amount will cost you less, but this isn’t always the case. Some insurance providers reward their clients who choose to be insured for larger amounts with discounts. You can also choose to get a joint life insurance plan for you and your spouse. Many insurance providers offer discounts for joint policies or for combined policies.
5. Under-Insuring Yourself.
How can you make sure you are insured for the right amount? Some people look at how much premium they can afford or how much an agent suggests they get. A better way to approach what amount to be insured for is to determine it before you start searching for quotes. Many believe life insurance covering ten times your current annual income is adequate, but there is more to consider.
Ten times your current annual income would give your family ten years’ worth of income right now. Ten years from now, however, the same amount of money could support them for a much shorter period. There may also be outstanding debts your family needs to settle. It’s wise to consider inflation rates and to update your policy often to ensure coverage is adequate.
6. Using Life Insurance for Investment.
Life insurance is not an investment, but some choose to use it for investment purposes like retirement. When returns from life insurance and other investment options are compared, life insurance often falls short. Young investors may acquire better long-term returns and accrue wealth with equity.
View life insurance purely as a means of protecting your family’s future if you can no longer be there. When considering what type of insurance plan to get, a term insurance plan is the simplest and most straightforward. Premiums are more affordable, meaning you may have a surplus of money available for investment, which you can then use to invest into more lucrative options.
7. Using Life Insurance for Tax Planning.
You may have been told using life insurance as a means of tax planning is wise. The truth is this is one of the least rewarding tax saving investments out there. Generally, returns on insurance plans range between five and six percent, where a public provident fund, for example, can give close to nine percent of tax-free returns. Equity linked saving schemes may also offer higher returns long-term.
8. Cancelling or Withdrawing Before Your Policy Matures.
Some insured individuals cancel their policies when they run into financial difficulty. This is a serious mistake. You may hope to buy another policy when circumstances allow. Remember, however, that your life insurance will get more expensive the older you get. You also cannot predict the time of your death. It’s safest to never relinquish your policy. Instead, create a financial plan that provides contingency funds to help you cover urgent costs.
9. Withholding Information During Application for Cover.
By withholding information like health information, some think they can save on monthly premiums. It is better to be completely honest with your insurance provider when applying for insurance. If your provider learns you have been dishonest, they may refuse to pay out or your cover could be reduced.
10. Failing to Nominate Beneficiaries.
Many insurance providers will ask you to nominate beneficiaries as a standard step in their process. Failing to do so can be problematic later. Without a nominated beneficiary, the pay out of your policy could take years to settle.
If your beneficiaries are underage, often your insurance provider will pay the money into a trust. It’s a good idea to set up this trust yourself and to confirm how these funds should be transferred. If you don’t do it now, it will be up to your family after you’re gone and will delay the pay-out.
11. Not Reviewing Your Cover Regularly.
Life insurance is not a buy it, pay for it, and leave it kind of purchase. Reviewing it yearly, at the least, is valuable. You can ensure your cover will be enough should you pass away by updating your cover amount, so it is enough based on your calculations from point 5 above.
DISCLAIMER: The information provided in this article is meant for informational purposes only and should not be construed as legal, medical, or financial advice. Facts stated in this article are correct at the time it was published.
Sources: smartlife; ratehub; 1Life;