If you've never purchased life insurance before, it can be a confusing process. It's up to you to determine how much life insurance you need and what type of policy -- or policies -- you need to purchase. So, before you start getting quotes, check out these common mistakes so that you can avoid them.
Looking at Life Insurance as a One-Time Purchase
There isn't a set amount of life insurance a person needs. It depends on your personal financial situation. So, there are several ways to calculate the amount that fits your needs. Ideally, you should have enough life insurance to cover the amount of major debts, your funeral expenses, and several years of your annual salary. However, these amounts all change over time. So, you should reevaluate your life insurance needs every few years and any time you make a major life change, such as getting married, having children, or buying a new house.
Buying the Wrong Type of Life Insurance Policy
There are two main types of life insurance policies that you can purchase: cash value and term. A cash value policy has a higher premium than a term life insurance policy, but the premium and the value of the policy remain the same throughout its duration. Also, cash value policies don't expire. Term life insurance policies have lower premiums, but they are only good for a specific term. So, in order for the policy to pay out, you have to die within the policy term. Also, term life insurance policies typically have a lower cash value that increases over time.
Both policies are beneficial for different reasons. It's a good idea to purchase a cash value life insurance policy to cover specific debts and future expenses. However, if you have a temporary financial need, such as college tuition for a child, you should consider purchasing a term life insurance policy that covers the cost. This way, you're only paying an additional premium for the short time your financial need has increased.
Not Matching the Term Length to the Need
When you're buying a term life insurance policy, you need to make sure the length of the policy matches the financial need. For example, if you're purchasing a term policy to cover your family's financial needs until all of your children are finished with college, and your youngest child is currently seven years old, you need to consider the cost of your premiums for the next 20 years. So, ideally you want to purchase a 20-year policy. If you do purchase a policy with a shorter term for whatever reason, you need to review the premium rates at your renewal to make sure they don't increase significantly because you'll need to renew the policy to maintain the coverage needed.
While there are a lot of things that you need to consider before purchasing life insurance, the process doesn't need to be stressful. If you've taken your financial situation and the different types of policies into consideration and you still aren't sure what you need, take the time to talk to a financial adviser, such as those at Family Focus Financial Group, to help you determine your family's needs.