Nobody wants to think about a tragedy within their family but it's always best to plan for the worst and hope for the best. Unfortunately, not everybody thinks that way.
At the time this article was published, only 38% of Canadians had a life insurance policy, even though was available to over 64% through their employers. As of March 2022 an estimated 52% of Canadians admit to not having life insurance even though life inquires saw a 50% increase in between 2019-2021. Is life insurance necessary? Absolutely, but there are some serious life insurance mistakes you should avoid at all costs. There are no shortcuts. Let's talk about them.
Mistake 1 - Not Buying Any
Not buying life insurance, or waiting too long to buy any, is a huge mistake, which is why it's at the top of the list. The longer it's put off, the longer that you or your family are at serious financial risk in the event of a tragedy.
Buying into a policy sooner instead of later can actually help you save money on your premiums, too. This is because the younger and healthier you are, the lower your risk, and the lower your rate. It can save you money over the long run while still guaranteeing your security. If you wait too long, you may not be able to buy into a policy at all, so keep that in mind.
Mistake 2 - Buying The Cheapest Policy
The point of life insurance isn't just to say that you have it. The point is to protect yourself and your loved ones in case of any tragic events. Nobody wants to think about the worst, but planning for it is always important, and that includes looking into the details of a policy before purchasing.
If you buy the cheapest policy just for the sake of saving money upfront, it's unlikely that the policy will actually live up to the needs of your family. Consider your salary or the salary of your household, your living expenses, and what a minimum and maximum payout may compare to them. Remember, it's a one-time payment that needs to last, so make sure it will.
There's also the possibility of the cheapest coverage not even covering your circumstances. The minimum and maximum payouts are important to know, but what happens if you or your family aren't paid at all? Well, there are different types of policies you can choose from, so consider the pros and cons of each for your financial situation.
If you are looking to save money, there are term life policies that can help you do that, depending on your circumstances. If you believe you will only need the policy to cover until your children are out of school, or until you and your spouse are retired, or any other circumstance, you can get a term life policy to cover that period of time.
If you are looking to be covered for life, it is worth the extra money for the guaranteed security in a life with no guarantees. However, you can start with a term life insurance policy and switch to life coverage later on if you change your mind.
The first policy that you see with a low number is unlikely to be the best option for you, but very well could be! No matter what, compare rates and payouts among different companies, and find some affordable coverage that works for you. It's okay to talk to multiple companies or get a few quotes before making any commitments.
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Mistake 3 - Not Seeing It As An Investment
You probably know that your car, home, health, dental, and vision insurance premiums add up to a small amount of your monthly income, but still, act as an investment. They save you huge sums of money in the event that something goes wrong. Why would that be different with your life insurance policy?
It's easy to think of it as something that won't benefit you directly, but if you make an investment and win millions of dollars, are you going to spend it all? No, you'll likely be passing a lot of it onto your family.
Well, this is an investment that not only could benefit your family but will. If you're not the only working person in the household, it may directly save your own financial future in the event of a tragedy within the family. Life insurance coverage is a safe, smart investment that you can buy into with very little.
As the wealth accumulates, you'll even be able to access the account while you're alive, in the event you need to borrow money. While it is different from trading stocks, life insurance coverage is extremely similar to opening a retirement account. The only difference is that it's often more affordable and possibly even more necessary.
Mistake 4 - Allowing Your Policy To Lapse
If you allow your policy to end, you'll have to reapply, which could involve more medical assessments as well as more money. Why is this? Well, your risk factor is based on your age, medical history, and a lot of other factors that change over time.
If you allow your policy to lapse, you could be spending a lot more on your next policy every month. Simply keep up with your payments and don't forget to renew your policy before it lapses to avoid any issues down the road.
It may also limit your coverage. You may have had coverage on your previous policy up until age 95 with a payout of $1.2 million only to have your age dropped to 86 with an $800,000 payout. Avoid lapsing at all costs to maximize your benefits and keep your premiums uniform.
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Mistake 5 - Borrowing Against Your Policy
Similar to a retirement fund, you want to avoid borrowing money from your policy as much as possible. Part of your premium will be stored into an account to which you will have limited access while you and your loved ones are still alive and in good health. As the funds accumulate, it may be tempting to dip into in the event that you need to borrow money.
You can even get tax-free loans or withdrawals from your accumulated policy. However, it's best to avoid borrowing for many reasons. Not only will it reduce the death benefit, but if the policy lapses or runs out of money, the money withdrawn or borrowed will become taxable.
If you do borrow money from the policy, it has to be managed extremely carefully, and done only when absolutely necessary. If it can be avoided, it should be.
Mistake 6 - Lying on Your Application
This could be argued as the most critical life insurance mistake for several reasons. Lying on your application could cause serious legal complications, or even inadvertently cost you more on your premiums, or secure a lower or non-existent payout in the event of a tragedy.
If you are caught lying on a life insurance application, the insurance company can immediately deny or cancel your coverage. If you are caught in a lie, even before coverage starts, it will be logged into a database for other insurers to see, which could hurt your chances of finding affordable coverage, or any coverage at all.
If they find out about it after your untimely death, they can challenge the payout. For example, if you smoke cigarettes but lie about it on your application, and you pass away because of smoking complications, the life insurance policy could potentially be voided.
If it's a small lie, like your height or weight, you may still be permitted coverage but it would likely be at a much higher rate than if you had told the truth. This is because the company loses faith in the rest of your answers.
You could also be charged with fraud and taken to court, where you could be forced to pay substantial fines or even jail time depending on the nature of the offense. All in all, it is definitely best to tell the truth, even if it costs you a few extra dollars a month. You can even read some horror stories about lying coming back to haunt people.
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Now that you know some common life insurance mistakes to avoid, you know what to do. Look around and find the right coverage for you and your family, talk it through, tell the truth, and get insured. Be sure to stay up to date with our latest insurance news and get a quote today to see if our services are right for you!