Big Life Insurance Blunders: Barbara Marquand's Guide

Barbara Marquand, a senior writer at NerdWallet, specialising in homebuying, homeownership, and mortgages, highlights some of the most common mistakes people make when it comes to life insurance. In her article, Marquand discusses how life insurance, though seemingly straightforward, can become complicated, and how these errors can be costly. She covers a range of blunders, from buying too much or too little to buying the wrong type of policy, putting off the purchase, and relying on free life insurance from employers. With careful planning and knowledge, Marquand believes that these pitfalls can be avoided, ensuring families have the financial safety net they need.

Buying too much or not enough

Not everyone needs life insurance. If you don't have anyone depending on your income, you probably don't need much or any life insurance at all. However, if you have young children, you will need a lot.

For breadwinners, a rule of thumb is to have at least seven times your annual salary, plus money to pay off debt and fund college. "Those dollars really add up," says Alyssa Lum, a certified financial planner.

Stay-at-home parents don't need as much, but should have some coverage to cover child care and other services that they provide.

It's important to consider your financial situation and what you can afford. Life insurance is meant to provide financial protection for your loved ones in the event of your death. However, if the cost of the insurance is a burden or you're sacrificing other financial goals to maintain the policy, you may be paying too much.

Additionally, if you're healthy and have no pre-existing conditions, you may be able to get a lower rate on your policy, which can help you avoid paying too much.

Buying too much or too little life insurance can have significant financial implications for your loved ones. If you buy too little, your family may not have sufficient funds to cover their expenses and maintain their standard of living in the event of your death. On the other hand, if you buy too much, you may be paying more in premiums than you need to, which could impact your financial flexibility during your lifetime.

Therefore, it's essential to carefully assess your financial situation, consider your dependents' needs, and choose an appropriate level of coverage to ensure adequate protection without overspending.

Buying the wrong policy

There are two main types of life insurance: term and permanent. Understanding the difference between the two is crucial when deciding which policy to buy.

Term life insurance

Term life insurance is a simple and cheap option that offers coverage for a certain period, such as 10, 20, or 30 years. It pays out if the policyholder dies during that term. It is the best choice for most families, as it can cover you while your children are growing up or you're paying off debts, such as a mortgage. By the end of the term, you may no longer need life insurance.

Permanent life insurance

Permanent life insurance, such as whole life insurance, lasts your entire life and includes a savings component called cash value, which grows slowly over many years. You can borrow against the cash value or surrender the policy for cash. It is more complicated and expensive than term life insurance and nets the highest commission for insurance agents.

Permanent life insurance can be a good option for those with lifelong financial dependents, such as a child with special needs, or for those with large estates that may incur taxes for heirs.

Choosing the right policy

When deciding between term and permanent life insurance, it's important to consider your unique circumstances and seek advice from a trusted financial advisor. Most people only have a finite need for life insurance, so term life insurance is often sufficient. However, for those with lifelong financial dependents or large estates, permanent life insurance may be a more suitable option.

Putting off the purchase

Putting off buying life insurance is a common pitfall, as it's easier to delay than to think about how your death would affect others. However, this is a risky gamble, especially if you have young children. "That's a pretty risky gamble, especially if you have small kids," says Michael Kelley, a certified financial planner in Cleveland, Ohio.

The good news is that life insurance might be cheaper than you think. Most consumers overestimate the price of term life insurance by more than three times, according to a 2018 study by industry groups Life Happens and LIMRA. The study found that the actual cost of a 20-year, $250,000 term life policy for a healthy, 30-year-old non-smoker is about $160 a year.

If you're worried about the cost of life insurance, it's worth comparing quotes from several companies to find the best rates. Don't put off purchasing life insurance, as rates tend to increase with age and the development of health conditions. By acting sooner rather than later, you can secure more affordable coverage.

In addition to cost concerns, individuals may delay purchasing life insurance due to the uncomfortable nature of contemplating their own mortality. While it can be challenging to think about your death and how it would impact your loved ones, facing these difficult questions is essential for ensuring their financial security.

In conclusion, putting off buying life insurance is a common mistake, but it's important to prioritize this decision, especially if you have dependents. By comparing rates and acting promptly, you can find affordable coverage that provides peace of mind and financial protection for your loved ones.

Relying on free life insurance at work

As such, it is recommended to purchase your own life insurance policy if you require it and consider any free benefits from work as a bonus rather than a substitute. This way, you can ensure your family has the necessary financial protection they need.

Moreover, almost one-third of Americans believe they need more life insurance, and 43% say they would face financial difficulties within six months if the primary wage-earner passed away. Despite this, over half of Americans do not plan to buy life insurance in the next year. Therefore, it is important to assess your own situation and make sure you have adequate coverage to provide for your loved ones in the event of your death.

Buying a policy without shopping around

Life insurance is a financial safety net for families, but it can be complicated to decide whether to buy it and how much to buy. One common mistake financial planners see is buying a policy without shopping around.

Life insurance quotes for the exact same coverage can vary widely by company. For example, the price of a 20-year, $500,000 term life policy for a healthy 30-year-old nonsmoking man can range from $244 to $655 a year.

It's important to compare prices and check the financial strength rating of any company you consider. You want the strongest possible ratings to ensure your company will be able to pay out an eventual death claim. Ratings agencies such as A.M. Best provide financial strength ratings.

By shopping around, you can find the best rates and ensure you're getting the most for your money. Don't just go with the first policy you see – take the time to do your research and compare prices and ratings to get the best value for your needs.

In addition to cost, it's important to consider the type of policy that's right for you. There are two main types of life insurance: term and permanent. Term life insurance is simple, cheap, and covers you for a certain period, such as 10, 20, or 30 years. It pays out if the policyholder dies during that term. Permanent life insurance, on the other hand, lasts your entire life and includes a savings component called cash value, which grows slowly over time. It's more complicated and expensive than term life.

When buying life insurance, it's crucial to consider your own needs and circumstances. Factors such as your age, health, and financial obligations will play a role in determining the type and amount of coverage that's right for you. Don't rush into purchasing a policy without first shopping around and weighing your options.

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