Life Insurance Is Important but You Can Get It Wrong

Some common mistakes can be costly to your loved ones.

Life insurance is a very handy tool, when it comes to estate planning. However, unless you are careful, it is possible that it won’t accomplish what you intended, according to The Washington Post, in “Don’t make these big life insurance blunders.”

Here are the common mistakes that financial planners see:

Too much or not enough. Not everyone needs life insurance. If no one is depending on your income, you may not need any. However, if you have young children, and especially if you are the only breadwinner, then you need a lot. Even a stay-at-home parent needs coverage. If you died, how would the surviving spouse cover the cost of child care and all the other tasks that are done by the stay-at-home parent?

One rule of thumb is to purchase seven times the amount of your annual salary, plus money for college educations. That’s a lot of insurance, but the protection is well worth it.

Buying the wrong kind of policy. There are two kinds of policies, and they serve very different purposes. Term life is simple and cheap. It offers coverage for a specific amount of time, usually 10, 20 or 30 years. If you die while the policy is in effect, it pays proceeds to the beneficiaries. If you live past the term, it has no value. It’s a good pick for most families, offering protection when kids are young or there’s a mortgage that needs to be paid. The idea is that, at the end of the term, you don’t need the insurance anymore.

There’s also permanent or whole life insurance. Many people get sold these policies, usually with the argument that they are building cash value. The problem is that the fees and agent’s commissions consume a lot of that value. One school of thought says to instead put money into tax-advantaged retirement accounts. If you’ve got money left over, use a low-cost index fund instead of funding a life insurance policy.

Permanent life insurance is valuable if there is a special needs child who will be financially dependent on the parents. In that case, speak with an elder law attorney with special needs planning experience.

Depending on the life insurance in your employee benefits package. Check with the HR department to make sure you know how much coverage your work benefits provides. It’s likely not enough to protect your family. When you leave the company, the coverage ends.

Procrastinating the purchase. Many people treat the purchase of life insurance the way they do having their wills and estate planning done. There’s always something else that needs to be done first. However, if you wait too long, it may become more expensive. Get a few quotes from reputable companies and make a decision.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and may include choosing the correct life insurance to accomplish your goals.

Reference: The Washington Post (Nov. 1, 2018) “Don’t make these big life insurance blunders”