Now that it’s September, many people are focused on getting into the swing of the school year and putting behind them the more-relaxed pace of summer. Not many are focused on thinking about life insurance. But actually, September is Life Insurance Awareness Month (who knew?), so it is a natural time to focus on this topic.
Over the years, I’ve seen that there is a lot of confusion around this topic – from what type of insurance is best to how much you need and where to get it. With that in mind, below are five common mistakes people make when it comes to life insurance. Hopefully, through this list, you’ll be able to get a better understanding of how life insurance works and why it’s a crucial financial tool for you and your family.
Mistake #1 – Having no life insurance at all
Many people simply overlook the importance of life insurance. It doesn’t appear to be something they need and it can be viewed as an added expense. But take a second to stop and consider all the important people in your life. If you weren’t there, how would they be impacted financially? It’s not fun to think about, but by “playing dead” you can begin to understand that life insurance is a critical tool to ensuring your family feels financially supported should anything happen to you. For instance, if you have any outstanding debts or other financial obligations, a life insurance policy will help to ensure that those burdens do not fall entirely on your family members. Remember, it is also important to get life insurance sooner rather than later because the cost can increase exponentially as you age.
Mistake #2 – Relying solely on employer-provided workplace life insurance
Life insurance provided by your workplace is an excellent benefit and can serve as a good starting point for your base coverage. But remember any life insurance provided automatically as a benefit is just that – a starting point. You can purchase additional coverage through your employer or on your own to help fill the gap. Remember, like most other employer provided benefits, workplace insurance terminates in most cases when your employment does. Having your own policy that you control protects you and your family regardless of your current employment situation.
Mistake #3 – Only considering term life insurance
Term life insurance provides a “death” or “survivor” benefit, which is the amount beneficiaries receive if you pass away, for a certain period of time (15, 20 or 30 years are common increments), after which the coverage ends. An alternative solution would be to adopt cash value life insurance, which similarly provides a death benefit, but will grow over the years as long as you continue to fund the policy. Furthermore, cash value life insurance can help with financial obligations in a tax-advantaged way, whether it is paying for college, a business venture, a mortgage balance or retirement. These policies are generally somewhat more expensive, but can make a lot of sense if you are able to commit to regularly funding the policy to maximize your cash options within the plan.
Mistake #4 – Leaving retirement savings vulnerable
If you do not have any/enough life insurance, your family is likely to look to your retirement savings for financial support. This may seem like a safe solution for finding additional resources, but I would advise against using funds saved specifically for retirement for another purpose. If you are the higher earner in the family, your spouse may have been relying on those savings for his or her own retirement. Similarly, if you spouse is forced to liquidate or take large loans from the retirement account, it will hurt the potential long-term investment gains that would have benefitted your family down the road. It is important that the money you are saving is allotted for different goals – from life insurance to retirement – so that you are making the most of each savings opportunity.
Mistake #5 – Guessing on how much life insurance you need
Many people we visit with or who walk into our office have no idea how much life insurance they need. Is it five times annual salary? Ten times? Some other figure? There are many factors to take into account to figure out how much life insurance is right for you. Often this is where a financial professional can really help with the process. We can help quantify how much and what type of insurance makes the most sense for you and your family, based on your needs, and then help get that coverage in place.
At the end of the day, we all just want to know that our loved ones will be taken care of after we’re gone. I have seen firsthand the peace of mind a life insurance policy can deliver. So this month, as life speeds up again, take a few minutes to pause and think about the future. Life Insurance Awareness month may only last a few more days, but any month is a good month to ensure your family is protected. A good policy that’s right for your family will protect them financially and could have an impact on them for years to come!