While everyone has their own reasons for purchasing life insurance, most of the time the policy is intended as a way to help your family financially should you pass away. When used correctly, life insurance is an incredibly valuable component of a financial plan.
Unfortunately, life insurance is frequently bought without a close look at its terms, which means you can spend thousands in premiums yet leave very little behind for your family.
If you’re looking for coverage, be sure to avoid the following common mistakes which can nullify your investment.
Living Past the Maturity Date
Permanent life insurance policies, such as whole life or universal life insurance, typically come with maturity dates that are tied to your age. When the maturity date is reached, the policy essentially expires and the insurer pays you a certain sum of money. With universal life insurance, for instance, the amount of money paid out is often the policy’s cash value, which can be modest due to slow investment growth or reduced by its use over the years to pay premiums.
With a growing number of people now living into their nineties, there’s also a rise in policyholders who are living past their life insurance maturity dates, since many policies were sold with coverage that ends at age 85. And while it’s simple enough to buy life insurance that matures at age 121, this option may not be available if you already have coverage in place. Therefore,be sure to confirm the actual length of a universal life insurance policy before you purchase it.
Assigning No Beneficiary
When you pass away, life insurance death benefits are typically given directly to your designated beneficiary. This means that your life insurance benefit doesn’t become part of your estate, and thus creditors can’t come after it to repay any outstanding debts, such as an auto loan or student loan. However, if you don’t assign a beneficiary, or if your beneficiaries have all died, the payout does form part of your estate, and so may not reach your family as you had intended.
Assuming the Insurer Will Find Your Beneficiary
It’s all too common for children not to receive life insurance payouts because their parents failed to tell them a policy was in place, and so the child never made a claim for its proceeds. And it’s not uncommon, too, for families to get into disputes when a beneficiary is named unclearly (does “wife” refer to mean the first wife or the second wife?), resulting in financial benefits being eaten away by legal fees. The value of unclaimed life insurance policies actually exceeded a billion dollars a few years ago.
Life insurance companies typically will not invest in finding your relatives or in moderating family disputes, so it’s your responsibility to ensure such calamities do not occur after you pass away. Name all your beneficiaries explicitly, keep your list of beneficiaries updated, and provide each of those people with a copy of your life insurance policy. Without those steps, your family may not be able to readily make a claim.
Purchasing Coverage After You’re Ill
While companies will offer life insurance to people with illnesses or medical conditions, the premiums for such policies are typically higher those you could qualify for without the condition, and the amount of coverage you can purchase is generally capped. In addition, certain products will actually not pay a death benefit if you pass away too soon after purchasing the policy. Guaranteed acceptance life insurance policies typically have a two- to three-year waiting period during which, should you die, your beneficiaries would only receive the amount paid in premiums plus interest.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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