3 Huge Mistakes You Might Make When Buying Life Insurance
It's important to have life insurance. But read on to avoid some big mistakes people tend to make when purchasing it.
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There are some expenses people pay for that offer the benefit of instant gratification. When you pay for a streaming service, you can watch it at any time. When you pay for takeout, you get a delicious meal that same night that spares you from having to cook.
But then there are those expenses where you might technically never get to benefit from them at all. And life insurance is one of them.
With life insurance, you might pay for a policy only to never see an actual benefit. But if that's the case, it means you outlived your policy, so that's a good thing right there.
Plus, life insurance gives you a less obvious benefit -- peace of mind. Once you have a policy in place, you know your loved ones are protected financially in case something happens to you.
But if you're going to buy life insurance, it's important to go about the process strategically. And that means steering clear of these all-too common mistakes.
1. Buying too little
The higher the benefit your life insurance policy provides your loved ones, the more you're apt to pay for it. You may be inclined to choose a smaller benefit to save money on your premiums. But if you leave your beneficiaries with too little coverage, you're sort of negating the purpose of life insurance to begin with.
Of course, having some coverage is better than none. But as a general rule of thumb, you should aim for a benefit that replaces your salary 10 times over. This is especially important if you're the sole breadwinner in your household.
So let's say you earn $70,000 a year. You might pay less for a $350,000 benefit than $700,000. But the $350,000 might run out on your loved ones and eventually leave them in the lurch. So if you're going to buy life insurance, make sure to buy enough.
2. Buying too much
Just as you don't want too little life insurance, you also don't want too much. That means you're spending more money than you have to -- and that's money you could be using to cover other expenses or to enjoy life more.
Going back to the above example, you may decide to buy a $900,000 policy for extra protection. Or, if you have a $300,000 mortgage, you may decide to go for $1 million. Both of these numbers make sense.
But you probably don't need a $1.8 million policy in this situation. And if you decide to pay for one, you may find that your life insurance premiums are hard to keep up with.
3. Choosing a whole life policy
The benefit of whole life insurance is that it offers permanent coverage, whereas a term life insurance policy runs out eventually. Also, whole life insurance accumulates a cash value, so you're getting a payday out of your policy no matter what. If you buy term life insurance and outlive it, you don't get any money.
But whole life insurance can cost considerably more than term life insurance. And that's the main reason you may want to avoid it.
Policygenius says you can expect to pay up to 17 times more for a whole life insurance policy than for a term policy with the same payout. In other words, a term life policy that costs you $40 a month might cost $680 per month if you choose whole life instead.
Now, think about what you might do with an extra $640 a month. You might need that money to pay bills or to have wiggle room in your budget for leisure spending.
Plus, think about it this way. For that large a difference, you could always save and invest the money you aren't spending on a whole life policy. If you were to invest $640 a month over 25 years at an average annual 8% return, which is a bit below the stock market's historical average, you'd end up with about $561,000. So that way, you can sort of create your own additional policy, so to speak, without being obligated to spend the extra money each month.
Life insurance is certainly important to have. But do your best to avoid these mistakes when you're in the process of buying a policy.
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