4 Common Life Insurance Mistakes to Avoid
Having a life insurance plan is not like owning a car or a house – you do not have to watch it every day. It is often a long time investment (we are talking of decades here). However, you should make it a point to give your plan a review at least once a year.
With that in mind, let us take a quick look at some of the most common life insurance mistakes to avoid.
- Letting the policy lapse
Let us start with the most important one.
If you stop paying your premiums, your policy, in most cases, will cease to be in function. This means your plan will no longer be in effect. And in case the worst happens to you, your beneficiaries will not be able to claim the proceeds of your policy.
This is something you should try to avoid at all possible cost, especially if you have been paying your premiums for many years.
Note that most life insurance companies give you a grace period of 30 days after the due date to submit a payment. If no payment is done during this time, the policy lapses on the 31st day.
One simple step to avoid this is to ensure that the insurance company has your most up to date contact information and mailing address. That way, in case you miss a payment, they will be able to contact you before the policy lapses.
- Failing to keep your beneficiaries updated
The primary reason behind owning a life insurance policy is to leave behind something for your loved one(s).
You are typically given two beneficiary types to name: the primary and the contingent beneficiaries. If your primary beneficiary dies before you, the life insurance proceeds go to the contingent beneficiary.
If you do not have a contingent beneficiary named in your plan, the proceeds would go your estate. Even if you have a will, it can be subjected to probate resulting in delays and uncertainty for your family, as they navigate through probate.
Also remember that you have the option of changing your beneficiaries at a later time even if you had them named at the start of the policy. Major life-changing events, like a divorce or a non-spouse beneficiary meeting an untimely death before you, make it mighty important to review your beneficiaries.
- Drying up the options
Most life insurance companies give their term-life insurance customers a limited-time opportunity to “exchange” all or part of their plan for a longer term policy without a medical examination.
So, if your circumstances change after purchasing a 10-year term life insurance policy (for example, you have purchased a new home or there is a new baby in the family), you would be able to easily get a 20- or a 30-year term life insurance without having to re-qualify.
There’s another option called “conversion” that is available to term life insurance owners. With this option, the policyholder can convert some or all of his/her term life plan to a permanent insurance policy (one that lasts for lifetime) without any medical examination.
Should you go for exchange or conversion? Consult an experienced financial advisor to get the right advice based on your financial circumstances, giving you the highest value for your money.
Remember, both the “exchange” and “conversion” options expire after a certain point in time depending on your age. Do not procrastinate and dry up these extremely valuable options.
- Not being in touch with your financial advisor
Last but not the least, not keeping your financial advisor updated about your latest life changes is the biggest mistake you can make.
Important life events like marriage, buying a new home, having a baby, etc. play a crucial role in determining the amount of coverage you need. These should also trigger an immediate review of the plan you have. Your financial advisor can sort it out immediately.
So that is basically it. Be investment smart and avoid the life insurance mistakes highlighted above for you and your family.