Life insurance is a complicated but important kind of insurance coverage. It mainly consists of two types - Whole Life and Term Life. Unlike other insurance plans, life insurance pays out only after the covered policyholder passes away. Hence, it is vital to get the right life insurance coverage and avoid costly errors since rectifying them could prove to be near impossible by the time a problem is discovered after death.
With the Singapore life insurance industry seeing booming sales for 2021, Singaporeans are placing more emphasis and attention on the purchase for life insurance. Are they guilty of making these common life insurance mistakes? And are you one of them?
If you are currently in the market for life insurance or have recently bought a policy, read on to make sure you do not put your family's finances in jeopardy by making these mistakes.
Mistake #1: Waiting to Buy Insurance
It is not uncommon for people to delay their purchases of insurance policies. After all, the purchase of life insurance is a complicated matter. It is important to consider the amount of coverage you need as well and cost. It is certainly not easy to make a decision with the plethora of life insurance options out there in the market.
However, buying a life insurance policy sooner, rather than later, can work in your favor if you are seeking to secure a policy at the lowest possible cost.
Life insurance rates generally increase as people age or as their health deteriorates. In some cases, illnesses or health problems may make you ineligible for coverage. The longer you put off the buying decision, the more the insurance will likely cost. Postponing the purchase of a life insurance policy could cost thousands of dollars over a lifetime.
Mistake #2: Buying the Cheapest Policy
While it is important to shop for a life insurance policy that is affordably priced, the coverage that you are getting in return is also crucial. Life insurance policies can be a tad complicated, and it is a good idea to learn about their features and benefits.
Premiums of term life insurance are way less than whole life insurance, and for a good reason. Term life insurance only covers you for a set period of time while whole life insurance covers you until death.
If you believe that you would need life insurance for a set period of time, purchasing a term life policy would be best. On the contrary, if you are seeking lifetime coverage or you want to own a life insurance policy that builds cash value similar to investments, whole life insurance would be a better choice.
The cheapest policy may not represent the best value. There could be other insurers in the market offering much better coverage at a slightly higher price. Hence, it is essential to evaluate the value of the life insurance plan that you are considering or currently hold.
Mistake #3: Not Paying Premium on TIme
You are expected to pay a premium in return for coverage from your life insurance plans. These premiums are based on your insurance risk class, which takes into factor your age, health, and many others.
Missing a premium payment may have serious consequences. Rather than a late fee penalty, a missed premium payment could cause your life insurance policy to lapse and you will no longer have life insurance coverage. Depending on your insurer, you could get the policy reinstated by paying an additional sum of money.
However, in the event that you are unable to do so, you will have to seek a new life insurance policy. This could come with its own set of problems. Life insurance gets more expensive as you age, and even the difference of several years could lead to a substantial increase in cost. Any changes in health could lead to higher premiums or even ineligibility for life insurance altogether. The search for a new life insurance policy would also cause a coverage gap, and your dependents would not be insured if misfortune strikes during this period.
Life can also throw some unexpected curveballs at you; just as the recent Covid-19 events. Job loss, business failures or even serious illnesses could impede your ability to pay for your insurance premiums. Hence, it is advisable to balance the coverage you need with a premium you can reasonably afford, even when all things have gone south.
How to avoid? Pay your premiums on time! Ensure that you have sufficient funds in your bank account should you pay by GIRO, or set a monthly/yearly reminder for you to make payment. You should also consider using various platforms such as PolicyPal to track your various insurances.
Mistake #4: Too Little or Too Much Coverage
It is easy to under/overestimate how much your beneficiaries will need to maintain their current standard of living should anything unfortunate happen to you. Having too little coverage can have serious consequences for the people you leave behind, and they could face financial hardship as a result. Having too much coverage is also a problem due to the higher premiums charged to your card.
To calculate how much life insurance you need, consider what financial obligations need to be covered: replacing your income, paying off a mortgage or other large debts, and paying for your children’s education. Thereafter, consider what assets you have, such as savings, and if they are able to cover these costs. The difference between your assets and obligations is the gap that life insurance needs to fill.
As a rule of thumb, it is advisable for your life insurance coverage to be at least 10 to 15 times your current income. Nonetheless, this is just a rough estimate. Depending on your financial status, this number could be higher or lower.
Mistake #5: Failure to Reassess Your Needs
Most people would have their life insurance policy for quite some time, and there would a lot of changes during that time. Your life insurance needs will differ greatly when u are age 20, 40 and even 60. These shifts in circumstances would signify a need to change your life insurance policies or life insurance beneficiaries.
Determine whether you need more to meet the growing needs of your beneficiaries or less coverage due to the amount of money you have amassed through the years. Carefully consider your budget and needs before purchasing another policy of any kind, to make sure you have the insurance you need at the right price.
If there are any changes to your dependents, do update your life insurance policy accordingly when these changes occur. This ensures those relying on you do not miss out on vital protection, should anything happen to you.
Mistake #6: Borrowing From Your Policy
Life insurance policies that accumulate cash value could be a source of funds when you are in need of money. The cash value of a permanent or whole life insurance policy can generally be used for any reason you see fit, including tax-free withdrawals and loans, if done properly. Policy loans are borrowed against the death benefit, and the insurer uses the policy as collateral for the loan.
This is a great benefit, but it must be carefully managed. If you take too much money out of your policy and your policy lapses or runs out of money, all the gains you have taken out will become taxable. Not to mention, you would significantly reduce the death benefit available to your beneficiaries.
If you have taken too much money out and your policy is about to lapse, you may be able to maintain the policy by making additional premium payments, assuming you can afford them. When accessing your life insurance policy's cash value, be sure to monitor it closely and consult your financial advisor to avoid any unwanted tax liability.
The purchase of life insurance policies is a complicated affair, but we are here to make it simple for you. Keep in mind these 6 common mistakes before, during, and even after making your purchase.
Consider making your insurance purchase at an earlier age when it is more affordable. Select sufficient coverage at the right price and pay your premiums on time. Reassess your needs every now and then to ensure you have enough coverage. There are no rules that disallow you from having multiple life insurance coverage, so go for it if the need arises. Avoid borrowing from your life insurance policies, and ensure you are able to manage them wisely when you do.
If you are still unsure of how much coverage you need, check out here for a more personalised quote from our experts.
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