Getting life insurance is important, however it can be tricky. There a few traps some people fall into. As with any contract, always pay close attention to the fine print! That tiny font could have a serious impact on your life – and the life of your loved ones.
A little common sense and careful planning can help you avoid making mistakes with your life insurance and ensure your family is properly protected. Watch out for the following fine print “traps.”
Not reporting pre-existing medical conditions can void your policy. Leaving out vital information is the same as lying. When your insurance company determines that you have lied on your application, your claim will most likely be denied.
Having a policy for many years does not mean you will automatically be accepted for renewal. Some policies may have an automatic renewal option, but this will likely be at a higher rate because you will be older and your health may not be what it was when you first applied.
There are instances when you may need specialty coverage but beware of unnecessary insurance such as mortgage and accidental death coverage. Naturally, you want your mortgage to be paid off in case the major breadwinner dies (your lender will insist on it), but your traditional life insurance policy should be enough to cover your outstanding debt, including your mortgage, without the need and expense of special mortgage coverage. Special accidental coverage only pays when the insured dies in an accident, whereas a traditional policy pays no matter how the insured dies.
Some jobs are more dangerous than others (mining, construction, etc.). A dangerous job could put you into a higher risk category. If you change jobs after your application was accepted, your claim may be denied on the basis of this new, more dangerous job.
You may be declined life insurance coverage if you participate in extreme or dangerous sports. If you like to sky-dive or race cars, read your policy very carefully because chances are you will not be covered. If you don’t mention these hobbies on your application, your claim may be denied.
Many people don’t realize that they are not covered the minute their application is accepted. Some policies, especially guaranteed issue life insurance policies, have a 2-year waiting period. A non-accidental death within the first 2 years generally results in a refund of premiums and nothing more. This is to prevent insurance fraud.
Paying your premiums annually can save you money. Annual payments mean the insurance company can save administrative costs and may pass these savings onto you.
Hiding your driving record, especially serious accidents you may have caused or repeated traffic violations, can cause your claim to be denied. Dangerous driving puts your life at risk which means higher premiums. Not disclosing your driving history could be interpreted as insurance fraud.
A term life policy with a level premium guarantees a set premium for the life of your policy. However, the fine print may include an automatic renewal clause. The renewed premiums can be much higher than what you have been paying.
Many professional associations have created group life insurance plans for their members. These plans save you the hassle of shopping around for coverage, but won’t necessarily save you any money. To enjoy the group rates, you must be a member of the association. The annual dues of the organization may eat up any savings you may get from lower group premiums.
When you buy life insurance, you choose who will receive the benefits in the event of your death. It’s important to look at your policy once in a while to ensure the beneficiary you chose in the beginning is still the person you wish to designate. Many people forget to update old policies when they remarry.
If you are the owner of your life insurance policy, benefits may be considered part of your estate and subject to estate tax. This isn’t usually the case, but read the fine print carefully to make sure your beneficiaries will receive all of the death benefits tax-free.
An Irrevocable Life Insurance Trust can help to avoid estate tax. You can transfer the ownership of your life insurance policy to the ILIT or the trust can buy the policy. You can add to this trust fund with annual exclusion gifts. The owners of the fund must notify your beneficiaries of the exclusion gift with what is called a “Crummey letter.” These notices allow the beneficiary to withdraw the gift right away. Without the Crummey letters, your gift is rolled into the balance and doesn’t qualify as an exclusion gift.
A group life insurance policy is a nice benefit offered to most full-time employees. Unfortunately, the coverage amount is usually not enough. Plans generally pay a death benefit of 1 to 2 times your annual salary. If you have a large mortgage and small children, this may not be enough. Plus, coverage ends when you leave the company, which means you have to try to obtain a new life insurance policy and could end up paying higher rates.
Certain types of life insurance are an important part of estate planning, however it is not usually a good idea to name your estate as your beneficiary. When your loved ones are not an option, it is generally better to name a trust, a charity or an organization. If you name your estate, the money could be tied up for months or years, not benefiting anyone.
Most people buy life insurance to help their children, but naming them as the beneficiaries when they are still minors is not wise. Insurance benefits can’t be paid until the court appoints a legal guardian for the children. This takes time and money. It’s better to name a trusted adult as the beneficiary (someone who will use the money to raise the children) or to set up a trust fund.
The internet provides easy access to every insurance company in the country, so there is no reason not to shop around, but some people still don’t bother. Life insurance premiums for the same amount of coverage can vary widely from one company to another. For example, a $500,000, 20-year term policy for a 30-year old non-smoking male can range from $240 to $650 a year. Read the fine print. There is more to consider than just price – read carefully to see exactly what you get for your money.
No one wants to think about dying, but putting off buying life insurance won’t prolong your life. All you will get is higher premiums and a greater chance of being declined. Your age and health are two major factors in determining your eligibility and cost of premiums, so the longer you wait, the more it will cost, if you can still qualify at all.
Deciding how much coverage you need isn’t easy. It is one of the most frequently asked questions we encounter. The most important factor is taking the financial burden of your death off your loved ones. Calculate your debt, your obligations (college tuition, raising your children, etc) and the amount of time you want your income to be replaced.
There are different types of life insurance – term, whole life, universal life, disability insurance, critical illness, guaranteed issue and group plans. Your needs, budget, health and various other factors will determine the type that’s best for you. An experienced insurance adviser can help you choose the right type of coverage for your situation.
Personal finances are just that – personal and private. Many people don’t like to discuss their finances, not even with family members. However, you must let somebody know about your life insurance policy or your beneficiary won’t be able to make a claim in the event of your death. Besides your spouse or adult children, other people you might want to let in on your secret include your attorney, executor or financial advisor.
A term life insurance policy can be quite affordable. A young, healthy individual can get a great policy for just a few dollars a day. That is a small price to pay for the piece of mind of knowing your loved ones will be provided with some financial security.
Term life insurance is convenient and sufficient coverage for most people, however how do you know how long you will need coverage? One school of thought is to out live the need for life insurance – which means that your mortgage and all of your debt is paid off and you have enough savings and investments to last for the rest of your life and maybe the lives of your children. Can you achieve this in 10, 20 or 30 years? At the end of each term, your premiums will increase dramatically because you will be older and your health will likely have deteriorated – you may even have been diagnosed with a serious illness since your last policy renewal, which could mean you will be denied coverage.
Cancelling a life insurance policy is easy, but getting it back is not. Think very carefully before you decide to cancel your policy. This decision could be very costly in the long run.
Permanent life insurance policies combine insurance coverage with tax-sheltered investments. The premiums are higher with this type of insurance, but the investment and cash value portion of the policy makes it worth while. You may think that you will save the extra cost of premiums and invest the difference yourself. This sounds great in theory, but will you really invest the difference?
