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Sarah Max, Fidelity Interactive Content Services If life insurance has been low on your list of financial priorities, you’re not alone. Some 30% of U.S. households have no life insurance whatsoever, and half admit to not having enough, according to research and consulting firm LIMRA.
While budget constraints account for some of this gap, the morbid nature of the product might also be to blame. Unlike, say, saving for retirement or college, thinking through the financial implications of death doesn’t exactly evoke warm and fuzzy feelings.
But better to confront your own mortality than leave your family a legacy of financial hardship. And, look at the bright side: “Prices are near all-time lows,” says Robert Bland, CEO of Life Quotes, a national life insurance brokerage. “You’ve got intense price competition, and the industry is realizing that people are living longer.” In fact, a healthy 40-year-old man could lock in a $1 million, 20-year term policy for about $640 a year, according to Life Quotes.
Taking stock of your insurance needs and shopping for a policy isn’t rocket science. Still, it’s easy to get tripped up by the dollars and details. Here are five common blunders to avoid.
Mistake No. 1: Counting on rules of thumb
A better way: Do an inventory of what you need and what you have.
A common rule of thumb is to buy insurance equal to 10 times your annual salary, but that guesstimate can result in not having enough or, conversely, buying too much. It can also lead you to overlook hidden costs, such as replacing employer-provided health insurance, as well as big-ticket items, such as college for your kids or retirement for your non-working spouse.
For most families, a term life policy is usually the go-to type of policy, and for good reason. It’s the cheapest insurance to fit the bill. As the name suggests, it offers a fixed premium for anywhere from 10 to 30 years depending on the term you choose. If you have kids, you’ll want a policy that doesn’t expire until they finish college. If your spouse relies on you for some or all of the household income, the term may be tied to when your mortgage is paid off or when you plan to retire.
Mistake No. 2: Buying permanent insurance at all costs
A better way: Cover your bases with term.
If your insurance needs go beyond your working years – for example, you want to cover estate taxes – a permanent policy may be appropriate. These policies, which come in the form of whole life, variable life and universal life, don’t expire and typically include a cash value component. When matched properly with a family's needs, such a policy can be an important addition to an overall financial plan.
But because these plans come in many different varieties – and are substantially more expensive than term insurance – you should consult a fee-only financial planner (who doesn’t make commissions on life insurance products) before going this route. First and foremost you need to make sure you have enough insurance to cover your needs.
Mistake No. 3: Relying on employer-provided insurance
A better way: Lock in a policy you can take with you.
Group life insurance is a common offering in company benefit packages. These policies, which typically cover from one to five years of salary, offer some financial cushion, but it’s best not to include them in the equation. If you lose your job you likely won’t have that insurance.
Some firms offer supplemental policies at the employees’ expense, typically subject to a health exam. Before you go this route, make sure the policy is portable, meaning you can take it with you when you leave the job, and see how the plans price out. As a rule, these policies are often more expensive than what you’d find on the open market. One exception: If you have a pre-existing condition that makes it tough to qualify for an individual policy consider stocking up on insurance when you start a new job. Some companies have a no-questions-asked period where new employees can buy supplemental insurance that isn’t tied to a health assessment.
Mistake No. 4: Not insuring a non-working spouse
A better way: Put a dollar value on his or her contributions.
At its core, life insurance is designed to replace income. That said, the death of a non-working spouse can still be a financial hardship. It can result in substantially higher child care costs and home maintenance costs. It can alsohave an impact on the wage earner’s ability to earn money.
To find the right number, calculate what it would cost to pay someone to help care for the children, manage the household and deal with all the other tasks that fall on the shoulders of a stay-at-home spouse.
Mistake No. 5: Fibbing on the insurance application
A better way: Be honest from the get-go.
It probably goes without saying, but your individual health – as determined by everything from your weight and blood pressure to medical history and prescription drugs – will greatly influence premiums. A 40-year-old male smoker, for example, can expect to pay about $3,900 a year for a 20-year, $1 million term life policy, according to Life Quotes. That’s about six times what his healthy non-smoking counterpart would pay.
If your health is less than stellar it’s particularly important to shop around, because different carriers are willing to take on different types of risk. Initially, you’ll be quoted based on the information you provide on the application, but because all of this information is verified via a medical clearinghouse and health exam, fudging the numbers will get you nowhere.
In fact, during the underwriting process you may be better off providing more information than necessary. If you have something in your health history, explain it. You’ll likely have a better outcome if you give this information up front.
Once you’ve done your homework and secured the coverage you need, don’t just set it and forget it. Experts recommend reassessing your coverage when you change jobs, buy a new home, have another child, get divorced or get remarried. Even if the dollar amount of coverage you need doesn’t change, some of the fine print could be affected.
The most obvious example is divorce. If you don’t update your policy to remove your ex-spouse, he or she will remain the beneficiary.
If you have let your finances fall into disarray and have been putting off the task of cleaning them up, then there is no better time than January to begin getting your financial house in order. Here are five things that you can do this coming year to get back on track financially and make the most of your money.
