Don’t we just hate thinking about life insurance. It means considering our own demise. So instead, ostrich like, many of us just say, “That’ll never happen to me.”
Sadly, aside from leaving our family totally unprepared for our demise, and unprotected financially, there’s another consequence to hating the very idea of life insurance. It means we’re just as likely to do it badly as to do it well. Here are eight common mistakes we make either when we’re buying our insurance, or in keeping it working well for us.
#1 We let the premiums make the decision for us. If you start from the premise that you can only afford to pay $x, and let that decide how much insurance you buy, then you’re going about it all wrong. You must first figure out how much insurance you need and then choose the type of insurance that will give you the level of coverage you’re looking for.
#2 We think of insurance as an investment. Well, it’s not. It’s risk mitigation. It’s just in case. It’s a necessary part of a sound financial plan. While certain types of insurance do build up money over time — products like whole or universal life insurance — that’s not the first reason for buying insurance. Insurance is about taking care of the “what ifs”. So the amount it will pay out to help your family cope should be your primary consideration, not the potential return on investment.
#3 We buy term because it’s the only game in town. The “term vs. permanent insurance” debate rages on. Term insurance, for which you pay only for the death benefit, may be the best fit for many people. However, other types of policies, such as universal life or second-to-die policies, may be a better choice in certain situations. Choose the insurance that’s right for you. Don’t pick something just because you’ve heard it’s what everyone should buy.
4. We confuse illustrations with reality. Life insurance illustrations are designed to show much a cash-value a policy will build over time. And a lot of insurance representatives got their wrists slapped because many of those illustrations implied consumers could count on their policies to be self-funding within a specific — often too short — period of time. But if you haven’t yet heard the news, illustrations are only projections of what may happen. They are not guarantees. The company’s rates of return may decline and earnings may not be sufficient to cover the premiums in the future. So don’t count your chickens.
5.We don’t check back to make sure we’re still well insured. At least every year or two, re-examine your policies to be sure they are still doing the job. If you got married, divorced, had a baby, or had a big jump in income, the amount of coverage may no longer be adequate. Or you might need to add a second, different type of policy, to meet new needs. You don’t have to buy from the same insurance company. Shop around.
6. We forget to change beneficiaries. Oyyy! I hear this one all the time. People, if you get a divorce, remarry, have a new baby, or if your partner dies, you need to review your insurance to make sure you’re not leaving a stash of cash to nobody — or worse, someone you hate! Imagine seeing the death benefits from a policy on your recently deceased spouse go to that person’s former spouse instead of you. Heads up. This is a far more common mistake than it should be when you consider the consequences.
7. We needlessly replace a policy. Sometimes it is appropriate to drop one type of life insurance policy and replace it with another, especially if your life circumstances have changed. But be careful about dropping a policy just to get a “better-performing” policy or for a cheaper premium. The flip side of this is people who automatically renew their term coverage, even when the reason for having insurance has grown up and left home.
8. We name our estate as beneficiary of our insurance. Insurance benefits are free of income tax to beneficiaries, but they face probate if the benefits become part of the insured’s estate. So make sure you’ve named a person (or people) as beneficiary — and not your estate — on your policies.
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How do you know how much life insurance you need to carry?
If you have no dependents, why do you need life insurance? Someone please enlighten me. I have it through my employer, their standard plan for roughly $250K, so why would I need more than that?
Karen, you have a hell of a good life insurance plan have to say. Personally, I think if you have no dependents then I think it’s highly unlikely you need any more life insurance. You have enough for your family to bury you and that’s what matters (I assume you also have no cosigned mortgages, etc other; even if you have a regular mortgage for more than the value of your house it’s not your parents problem, it’s the banks anyway).
Just a heads up on the “never leave your insurance to your estate” – check with a lawyer first. There are times when that’s what you would want to do – if for instance you know the estate will have significant tax obligations, you may wish to leave your insurance to your estate so that there is cash to pay the tax man without having to liquidate the investment or asset. And if you leave the insurance to a named person, that person has no obligation at all to help the estate pay bills. Same thing if you want your insurance to go to small children – I’d rather have a will that kept stuff in trust until they’re past the stupid years than have them get a payout at 18 that might be gone within a short period of time.
Just sayin’ -
We were planning on just renewing our term insurance next year…. but I called to see how much is was going to be and the premium was going to TRIPLE!!!! So we shopped around and found an insurer that was willing to give us more coverage in case of death and put our children as riders on the policy for only a few dollars a month more than what we are paying now (and WAY less than what we would have had to pay if we renewed our other plan next year). I admit it was bizarre having a nurse (aka stranger) come into our home and give us a physical complete with urine and blood samples… very invasive, but worth the effort in the long run. We went for term again for 2 reasons: monthly cost… sorry Gail it is reality that the cost-per-month needs to leave room for other savings) and mostly because we are working towards having the house paid off in ten years, so our financial needs will be different regarding an estate.
Tracy, does that “put our children as riders on the policy” mean you insured your children? Can I ask why? It seems unnecessary, unless your kids are bringing in a few bucks each month even if it isn’t much. And like you I have term life – but to be fair Gail said to investigate your options, not just choose term life blindly – sounds like you investigated! I am also a general advocate of term life over universal life but am always a believer in investigating options. It drives my wife nuts how many questions I ask about everything.
I insured my children because the expense to bury them and the time I we would need off work to recover from any tragedy like that would break us financially…. it is not a huge amount, but in the unthinkable case that we lost one or both sons it would take that worry away. The cost was very small on our insurance, and it was a feature I was looking for.
speaking from someone who has been with friends while burying their children, aside from the horrific situation itself, it is financially crippling.
it’s all well and good that your employer may give you a couple weeks off but most cannot return to work, sustain no income for months if not years, and the cost of funeral and burial can be quite large.
insuring children is very cheap, considering all those facts.
not all choose to do it, but if you live paycheck to paycheck now and have debt, you could be facing bankruptcy within weeks of the death of your child.
Hi everyone. I get why people put off dealing with life insurance and with wills – who wants to deal with their mortality? I postponed these important financial steps for a long time. But now my husband and I have a daughter and this changes everything. It’s all about protecting her and ensuring she (and any future brothers and sisters she may have) will be taken care of.
Karen’s comments about life insurance beneficiaries is an echo of the conversations I had today with my lawyer (for my will) and my financial planner (for life insurance). It was recommended to me that should both my husband and I die, the insurance pays out to our estate (it’s so funny that I have an “estate” — sounds like I’m super rich!) and not to our daughter directly until she turns 25. Yes, taxes will then have to be paid on the insurance benefits but the money can be kept in a trust until she is old and wise enough to use it. Preferably, after she’s gone to university or college.
Ok, points taken – it’s a personal decision. I understand the arguments for insuring children (and I have a one-year old myself so really understand the emotions involved) but life insurance is meant to replace the income taken away from the family by the loss of an income provider, not a cash windfall. The loss of a child is actually a financial benefit to the family, as there will no longer be costs incurred for daycare, food, clothing, education saving, toys, diapers. Even if living paycheque to paycheque, the costs of burial (approx. $5K) will soon be outweighed by the benefits of no more childcare. If you’re buying insurance for your children for piece of mind, well ok, but mathematically and probability wise you’d be better off putting that money aside into a disaster fund. However, this doesn’t work if you can’t work for months after the tragedy. But I know of people who have traumatic events and have dived back into work as a means of escaping it, and knowing me that’s what I would probably do.
Hello Gail
I have a story – mine, unfortunately – about life insurance.
I was raised in a family where I was insured – $500.00 in those days long ago. When I turned 21, my father rolled over the payout from this policy into another policy which I took on – a $5000.00 policy. When I started to work, I had the basic life insurance that they provided which was $25,000. and then I had the option to have additional term insurance up to 5 times my income. I did sign up for this as well. So I was insured sufficiently as a young single woman.
Now for the problem. I met a man who didn’t think insurance was all that necessary. I did marry him but insisted that he have insurance if we were to have children. It was a difficult sell but I did get him to understand (or so I thought) that insurance was necessary for all the reasons which have been given before – to cover immediate death costs, to provide for missed income, especially when children are young and the costs to help educate children in future can be so high, to pay off most or all bills – which might include a mortgage, and maybe to have a little over to use as necessary. We don’t know when we will die and the insurance gave me a sense of security if one of us died especially when the children were young. We each took out $100,000.00 whole life insurance as this was all that we could afford.
Well, the problem came after 25 years of marriage when he decided that he had the right to surrender his whole life insurance which was worth at this time $67,000.00 – without my knowing it. $9,000.00 in income tax is owing on this money and needs to be paid next year. My security went out the window!! I wouldn’t have done this to my spouse but it was his and he wanted it so that he could live his life to the full. He had no consideration of the possible effects that his death would have on me if he dies before me.
My advice to anyone is to think about how the policy is owned. I allowed my husband to be the owner of his insurance even though I paid all the insurances from my pay cheques. I shouldn’t have done so because he was intrinsically opposed to insurance at the beginning of our marriage. I should have realized that in old age he could revert to his old thinking patterns. The right answer might be to have shared ownership of policies – which would have required a signature from the spouse (if this is possible) or to have ownership of the other person’s policy. I have since learned that the province of Quebec is the only province which does it this way.
Learn from my experience! Don’t ever give your security away or have faith that your security will be fine in the hands of anyone else – especially a spouse. My insurance agent uses my example when talking about ownership with young couples – as they are filled with hope and trust. My insurance is now being left to my children – my husband (at this point) will get nothing – and he deserves nothing. For me, he broke a crucial vow to the very issue of what is important in a marriage. I also changed my Will (without his knowing it) to have family members be executors and POAs.
Be afraid – be very afraid of people who reject insurance as a need.
Slightly off topic, my parents purchased a life insurance policy for me when I was born. The premiums are quite low, so I was able to take them over when I moved out on my own a few years ago, making me the only one I knew my age that actually had a life insurance policy. At the time I had no dependants, so some would argue it was not necessary, but I kept it.
Now I have a partner (yes – I updated the beneficiary info) and hopefully soon we’ll start having children. I now have a larger term policy as well, but I know I can always count on this nugget of a policy. The premiums will never go up and soon I won’t even have to pay premiums on it as they’ll pay for themselves…
Call me odd, but I appreciate this gift from my parents! I don’t think buying a policy for your children is weird at all…
Dear K.
Kudos to you! I think the same way!!
I could have included in my prior entry that our children were insured – from the ages of 10 and 8 and it very much against my husband’s wishes. The insurance agent at the time even felt my husband’s disdain.
However, today. my children have a $50,000.00 policy each with two riders attached – one for any disability (payments will always be made) and one for accidental death. In this whole life policy, there is a provision for increasing the sum of the insurance by $25,000 on each of 7 different occasions at at the same cost as when I took out the policy!! Now – what do you think I pay for this insurance with the two riders?? For both boys it comes to $32.00 a month!!!!!!
This is a cheap investment to include in your budget and any parent who thinks about this aspect should understand that insurance is part of a family business plan. Insurance, when purchased for young children, provides those children with inexpensive insurance for the rest of their lives. Young children have NO physical ailments yet – which would cost the person much more money to be insured – that is if they could get insurance at a later date!!
In addition, there are other aspects to understand about buying cheap insurance for children. One is that there is a cash surrender value building within a whole life policy. When the child takes over the policy, this insurance can be used as collateral for a loan. You can’t do that with RSPs.
Also, there are times when you can take money out of a whole life policy – when really needed – without damaging the whole life policy in any way. It might even be tax free!! This is a great investment for anyone to consider.
As you mentioned K., there is the time when the payments for a policy will end – the insurance will be paid for by the premiums. This is fantastic for the person involved. No more money is required to expend on this insurance policy and you have guaranteed protection for the life of the policy.
Now, one thing that I have had to put up with is the thought that you don’t ever want to provide for your child’s ultimate demise. Well, no one would!! However, insurance is an investment and definitely part of the overall family’s business plan. Do you know how many children die? There are more than you would think. Teenagers are the most vulnerable to car accidents – drinking and driving, being with others in cars etc. There are young adults with type one – early onset diabetes – and many of these children die in early adulthood. Also, no one likes to think of all the children who die of cancer either. As well, when children develop chronic diseases which start in early adulthood then the young insured adult is protected with adequate insurance when they do marry. Having this insurance policy will then provide perhaps adequate insurance protection for their family. I did mention that this is a good family business plan.
One final thought about buying insurance for anyone young or old – is that we have no control over when we die. Being prepared for the inevitable might seem goulish to some individuals, but would you rather have parents weeping inconsollably, unable to bear the grief and to handle the costs of a funeral?? Not everyone is able to provide for a $7000.00-10,000.00 funeral out of their savings account – immediately. This should be by far one of the reasons why parents should consider the importance of life insurance for their offspring. It’s hard enough to deal with the thoughts of burial, caskets, ceremonies, possibly cremation, internment at a cemetry, and the after funeral luncheon. This would be the most vulnerable time of your life – because you have outlived your child. That is one of the hardest messages for parents to accept. Money may not be everything in life but it helps in times of great trauma to the family.
Would you want to have your family so unprotected because someone has told you that buying insurance means that you are wishing for your child’s death?? Hopefully, many people will wake up to the fact that we are to be prepared for all occurrences in life and the possibility of death is just one of them.
Gail had mentioned critical care insurance in a recent blog. I investigated this insurance because my agent said that he considered it far better than death insurance. As a result, I am considering a policy of roughly $200,000.00 for each son for again roughly $30.00 a month. Now tell me – isn’t this a wise investment for my sons? If anything ever does happen they can collect. If any of the many listed diseases don’t ever happen they will also collect because all the premiums paid will be returned to them when they surrender the policy!!
Insurance is the wisest investment for all to consider at any time of your life and should be the basis for every family’s portfolio or business plan.
Well said Maxine!
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