5 Mistakes That Can Ruin Your Life (Insurance)

There are numerous good reasons to consider buying a life insurance policy, such as a new marriage, a new child, or taking on a large amount of debt (like a house), family members would be struggling to pay off if something happened to you. Or perhaps you have experienced a firsthand the consequences of a loss of life—clear proof that people in your household will likely experience financial hardship.

If you're buying life insurance or have recently purchased a policy, make sure that you don't put your own family's financial situation in danger by making any of these mistakes.

Key Takeaways

• Life insurance can offer a measure of financial protection to your loved ones if something happens to you. 
• The higher your health and the more youthful you purchase life insurance, the less expensive it is. 
• It's important to comparison-shop when seeking life insurance so you can discover the best policy and coverage for you.
• Permanent life insurance covers you for your whole life and accumulates cash value over time. Term insurance only lasts for a predetermined time period (e.g., 20 years) and has no cash value. 
• It is possible for there to be more than just one life insurance policy, though you may be required to complete a medical exam to qualify for each one.

Mistake #1: Waiting to Buy Insurance

It would be prudent to take into account the coverage and cost of life insurance before purchasing a policy. Life insurance premiums are based on factors such as your age and overall health.

An early investment in life insurance may be sensible if you're interested in a policy at the lowest cost. Insurance premiums typically increase over time, as your health declines, or you may have a preexisting health condition or are ineligible for coverage due to it. The price of your insurance will be higher than the cost of the purchase of a policy the sooner you invest in it.

Mistake #2: Buying the Cheapest Policy

It's also vital to take into consideration your coverage, from the price to be paid for a policy that's reasonably priced. Life insurance policies can be a bit complicated, so you will need to become acquainted with their attributes and features.

For instance, term life insurance is cheaper than permanent life insurance. There's a caveat, however, that term life insurance only covers you for a time, while permanent life insurance can cover you until death, as long as your payments continue to be made.

Based on what you believe you'll need term life insurance for only 20 or 30 years, a term life policy can be a practical choice. On the other hand, if you're interested in term life insurance that will include cash value over time or you'd like a life insurance policy as an investment vehicle, you can save more by choosing permanent life insurance. You should compare the quotations of a variety of life insurance plans to familiarize yourself with what you're giving up for a special price.

Mistake #3: Allowing Premiums to Lapse

When you purchase life insurance, you're required to pay a higher premium in exchange for coverage. Again, these premiums may be determined by your insurance risk class, which corresponds your age, health, and other factors. A supporting party's non-payment can impact the guaranteed death benefits acquired on a universal life insurance policy for a predetermined period of time or for life.

Universal life is a permanent insurance plan type that has been marketed on the belief that it has guaranteed protection with a minimum guaranteed set rate for the lowest guaranteed rate is unlike term life insurance.

Some of these policies can be sensitive to the timing of premium payments. For example, if you're late sending in your payment or if it's a month late, your guaranteed policy may no longer be guaranteed. A policy purchased with guaranteed coverage to age 100 may only provide protection up to age 92 if a single payment is made late or missed, which may be problematic if you're unusually healthy.

Mistake #4: Forgetting Insurance Is an Investment

The Financial Industry Regulatory Authority defines variable life insurance as an investment, so treat it as such yourself. 

A variable life insurance policy is usually a permanent form of life insurance that provides insurance protection with cash value. Part of the premium generally contributes to insurance, whereas the remainder goes into a cash value account that is invested in investment alternatives similar to mutual funds that you may select. A variable life insurance policy is a type of life insurance that provides insurance protection with cash value. Part of the premium usually goes to life insurance, whereas the remainder goes into a cash value account that you may use for investment endeavors like mutual funds.

To maximize your variable life insurance plan's cash value growth, it's optimal to have a consistent investment strategy. This entails making sufficient premium payments, even during times when cash flow is low. If you cut your contributions short without good reason, the growth potential of your variable life insurance policy will decrease significantly. It's also important to monitor your strategy and periodically rebalance your investment accounts to your chosen allocation, just as you would do with any other investment account. This will ensure that you aren't taking on more risk than you had intended when you established your investment account.

Mistake #5: Borrowing From Your Policy

Permanent life insurance plans that accumulate cash values could be a good source of funds if you need money. The cash value of a permanent plan can usually be used for anything you like, including tax-free withdrawals and loans, as long as you do it properly.

This is one great benefit, but it must be addressed responsibly. If you take too much money out of your policy and your policy lapses or runs out of money, all the gains that you've taken out will become taxable. Additionally, you can substantially reduce the death benefit which is available for your beneficiaries when you pass away.

If your insurance policy is about to end, you can make additional premium payments in order to avoid losing the coverage. Carefully monitor your life insurance policy's cash value, and consult with your tax advisor to make sure any unanticipated tax liability doesn't apply to your benefits.