For many people life insurance, and the decision to buy it, is among the most critical financial decisions that an individual will make in his or her lifetime. That said, most people will purchase a policy without fully understanding all of its various features, meaning that the majority of policyholders are not taking advantage of everything that their products have to offer.
Experts in the life insurance industry have made a list of the most frequent mistakes. The following is a list of some common mistakes people make when they buy life insurance:
1) Naming your estate as your beneficiary is a biggie, as you want to avoid inheritance taxes.
2) Not naming at least two alternative beneficiaries, as the money will go to the estate.
3) Premium waiver – should a policyholder become disabled or seriously ill, this feature will pay the policy's premium.
4) Naming kids or grandkids, as a life insurance trust should be set up.
5) Failing to review your policy at least every three years. A great number of policies are payable to ex-spouses or others whom the insureds would not have wanted to receive the proceeds. Children born after a policy was purchased are often inadvertently omitted. Sometimes, the person named is long deceased.
6) Owning all the insurance on your life. If your total estate will never exceed the federal exclusion amount (currently $1,500,000), then federal estate taxes may not be a problem. But if your estate is likely to be greater than that amount over time, your ownership of insurance on your life may lead to federal estate tax.
7) Inadequate personal coverage. With a growing deficit, the federal estate tax at this time is far from dead, and state death taxes can be very high. Your survivors may not have enough (after taxes, payment of debts and other expenses) for food, clothing and shelter and education.
8) Failure to see if your employer, business, or practice can provide insurance on a more efficient basis. If you own, control, or have a voice in the decision-making process of a closely or publicly held business, having a life insurance policy provided by an employer may be much more cost effective to provide financial security for your family.
9) Accelerated death benefit – in the case that the policyholder is diagnosed with a terminal illness, he or she can take out cash advances that are applied against the policy's death benefit. This feature is often used to help pay for treatment, palliative care, and other services during the short time that they have to live.
10) Guaranteed purchase option – this feature allows an individual to buy life insurance coverage beginning at a specific date in the future or starting at a certain life event without the need to provide proof of good health.
11) Spouse or child term riders – a policy for life insurance that includes this feature permits a policyholder to also take out coverage for a spouse or dependent child (26 years old or younger). This can often mean discounts to premiums that would not be available if the policies were all purchased separately.
12) Long-term care riders – some policies include a feature that allows a policyholder to use his or her benefits to pay for long-term care in exchanged for a lowered life benefit.