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Purchasing life insurance is a crucial step in protecting loved ones and building a secure financial life. A life insurance policy ensures an untimely death isn't financially devastating, leading to a major decline in quality of life when the deceased person no longer brings income or services to the household.
Unfortunately, many people make mistakes when buying life insurance. These errors could result in policies that cost more or don't provide the right protection.
No one wants to make an error when purchasing one of the most important financial products of their lives, so it's important to steer clear of these four common mistakes.
1. Buying the wrong type of policy
There are different kinds of life insurance including term and whole life coverage. Buying the wrong kind could leave consumers paying more or leave them without the protection they need.
Term life insurance is the best type of protection for most people. It's more affordable than whole life coverage and is in effect for a limited time such as 20 or 30 years -- which is all most people need coverage for since typically they'll eventually stop working and earning income or stop providing services to their family such as taking care of minor children.
Whole life, on the other hand, is more expensive. But it has an investment component and remains in effect forever as long as premiums are paid. For those who have a lifetime need for insurance, such as a parent of a disabled child, paying more for whole life coverage may be well worth it.
2. Not buying the right amount of coverage
When buying life insurance, consumers must choose how much coverage they want. It's important to decide carefully on the amount of the death benefit that will be paid to surviving beneficiaries.
Buying too much life insurance could mean paying more than is necessary for unneeded protection. Life insurance isn't meant to make survivors rich but rather to ensure a loved one's death doesn't cause financial hardship.
Buying too little coverage, on the other hand, could be even worse as it could leave surviving family members struggling. Generally, it's important to take into account debts to be paid off, income to be replaced, the cost of a mortgage, and the educational needs of children when deciding on coverage. This is sometimes referred to as the DIME formula, which stands for debt, income, mortgage, and education.
3. Overpaying for unnecessary riders
Riders are add-ons to insurance policies. For example, it's possible to add a return-of-premium rider that allows premiums to be returned at the end of a term life policy if a death benefit doesn't pay out. Or it's possible to add coverage for minor children to some policies.
In many cases, these add-ons are expensive and unnecessary. Before adding any additional coverage beyond a basic death benefit, do the math to make sure it's really worth paying for the added protection.
4. Not shopping around for insurance quotes
Life insurance coverage varies from one insurer to another. There are differences in terms of both coverage and costs.
Anyone who is buying insurance should make sure to get different quotes from several providers to ensure they get the right protection for the best price. Not doing so could lead to overpaying or missing out on more comprehensive protection.
By avoiding these four mistakes, consumers can make sure they get the life insurance they need without overpaying so they can protect loved ones without draining their budget.
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