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How To Really Screw Up Your Life (Insurance)
Posted By Ron On February 19, 2010 @ 7:35 AM In Insurance,Life,Personal Finance | Comments Disabled
 People buy life insurance  for a variety of reasons: getting married, having children, buying a home, or estate protection. But no matter what your personal reasons for insuring your life, what you’re really insuring is your family’s ability to continue on without your income. You’re also insuring that your family isn’t saddled with your final bills, debts, estate taxes, and other obligations.
Having witnessed first hand the devastating effects of a breadwinner dying without life insurance, I’ve made abundantly certain that MY family won’t be put through that horror. Along the way, I’ve thought about some of the mistakes people make when it comes to insuring their family’s ability to continue on without them.
Maybe making these mistakes won’t actually screw up YOUR life, but the lives of those you leave behind:
Yes, that’s the number one mistake people make when it comes to life insurance — procrastination . The moment you feel the need, it’s best to get a life insurance  quote and begin making preparations in your budget. The longer you wait, the higher your premium costs will go because rates are based on age.
Most experts agree that breadwinners need to have at least 15 times their annual salary in life insurance. That’s what I carry on myself, though I’m thinking about adding to it. But even if you don’t have a family, it still makes good sense to have a little life insurance , probably through your employer. Why? If you were to die suddenly (it’s always sudden, isn’t it?), you’ll leave behind someone who will have to settle your estate, no matter how small it is. There will be debts to settle, medical bills and deductibles (potentially), as well as funeral expenses. A small life insurance  policy through your employer will cover all those and more. It’s the responsible thing to do.
I’ve actually heard people say that life insurance  companies are betting that you’ll live, while you’re betting that you won’t. People don’t like the idea of getting life insurance quotes or dealing with life insurance companies. It reminds them that their life IS short and they already know who wins the bet … the problem is that when they win that bet, they don’t get to experience the payoff!
Making this mistake automatically ties up everything in probate and makes any benefits subject to inheritance taxes. Essentially, you’re naming Uncle Sam as your beneficiary. Go ahead and name someone, preferably a responsible family member, and also name a secondary and tertiary beneficiary as well.
The life insurance company backing up that policy may not be the strongest from a financial sense. Don’t just buy cheap term life insurance, do some research. You don’t want to make payments for 28 years only to die and leave your family to find out that the life insurance company was insolvent. Always seek out respectable life insurance companies such as New York Life which is a mutual life insurance company, not a public life insurance company. Mutual companies are not owned by shareholders, but by the policy holders. It DOES make a difference in how they view you as a customer.
Not all term life insurance policies are created equal. If you’ve decided to buy term life insurance, look for a term policy that’s “convertible.” That means that when the term runs out, you have the option to convert over to a whole life policy without evidence of insurability. Why is this important?
Say you buy a 20 year level term life insurance policy when you’re 30. Later, at age 43, you are diagnosed with a disease, which one doesn’t matter. Treatability doesn’t matter either. When you’re term life insurance policy runs out just 7 years later, you’ll have to re-apply and be judged on your “insurability.” Since you now are labeled with that disease, your rates will be HUGE if you can get life insurance at all. You may discover that you are uninsurable. Having a convertible term life insurance policy will insure (pardon the pun) that you can get the life insurance coverage you need for your family.
Today, this isn’t the problem that it used to be. Formerly, payments to life insurance companies were made on an annual or semi-annual basis, but today, most companies draft your checking account  on a monthly basis. It’s up to you to make certain the money is in the bank, though. Miss a payment and you might find your policy is lapsed.
Believe it or not, all the financial pundits *SURPRISE* aren’t necessarily correct when they say to ONLY buy term life insurance (sorry Dave Ramsey). Certain permanent life insurance policies are a perfect fit for some personal financial situations, but I’m not going to get into the whole term vs whole life insurance thing. If you decide to purchase a whole life insurance policy or a universal life insurance policy based on your personal financial circumstances, you will eventually have the option of borrowing from its cash value. But you must manage these withdrawals carefully. Take out too much causing your policy to lapse or run out of money as a result, and all those gains you’ve taken out become taxable.
If you do withdraw too much money and your life insurance policy is about to lapse, you may be able to maintain it by making additional premium payments. When tapping your life insurance policy’s cash value, be sure to monitor it closely and consult with your tax advisor to avoid any unwanted tax liability.
This article was included in the Carnival of Personal Finance at Taking Charge . Thanks!
Photo by ale2000 
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