11 Mistakes to Avoid while Taking a Life Insurance Policy
Life insurance solutions provide a secure future for the family, on the off chance that your death leaves them in a position where they have to fend for themselves.
Choosing the right life insurance policy can be tough, with the different types available and what they have to offer. It is very easy to fumble when making a decision regarding a life insurance policy. To avoid problems with life insurance, take the time to consider a few scenarios before purchasing a policy.
Take a look at the 11 most commonly made life insurance mistakes (so you can avoid them):
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Relying on Your Employer
Many people make the mistake of relying solely on their employer for insurance coverage. Employer-sponsored life insurance does not always work out as the best insurance option, simply because either quitting or being fired from the job means leaving the insurance behind too.
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Purchasing Life Insurance without Due Diligence
Every individual has different needs to consider when opting for life insurance. Considering the numerous options available, it can be confusing to pick one that suits individual and family needs. Put in the time and do the needful research in order to purchase the best-suited policy.
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Not Choosing the Optimal Term
Choosing the right term for a policy can make all the difference. Granted that choosing the shortest term means paying the least premium, but then again that’s at the sake of not having enough cover when it’s genuinely required. Consider the coverage need before picking the term.
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Ignoring the Need for Coverage
Investing in a term policy involves paying low premiums to get a substantial amount in coverage, especially when compared to the higher premiums of permanent life insurance. With a minor increase in premiums, it’s even possible to double your coverage, so start there if you can’t afford whole life insurance yet.
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Assuming the Initial Quote is Guaranteed
In the financial world, nothing is guaranteed. When it comes to life insurance, unless one goes through the legit channel of getting thorough investigations of medical, criminal, work and credit history, the initial quote is always subject to change.
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The “Unholy Trinity” – Insured, Beneficiary and Taxes
When an insurance policy is bought on the purchaser’s name and a beneficiary is named, the beneficiary can claim tax-free death benefits. However, the tax exemption doesn’t apply when the policy owner is not the one being insured, and tax is payable by the owner when the policy kicks in.
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Naming the Estate as Beneficiary
It’s a good idea to avoid making the mistake of naming your estate as beneficiary. This can open the door to a world of difficulties such as probate, besides which, creditors can get in on the action and estate taxes can pile up.
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Purchasing Key Employee Life Insurance
If an employer purchases key employee life insurance, the policy is going to be subject to income tax. The only way around it is to meet the certain employee notice and requirements before the policy is issued, in order to avoid tax matters.
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Trying to Change the Policy after a Loan/Withdrawal
One of the advantages of permanent life insurance is being able to withdraw money against its cash value, which grows once the policy is purchased. In case you try to change the policy post withdrawal, the loan structure is subject to change as well.
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Borrowing or Using Cash Value for Retirement Funds
Permanent life insurance is often a top rated retirement plan unless there is borrowing involved against its cash value, which automatically makes the funds received on completion, taxable. Waiting a few years to borrow funds against the cash value not only increases the loan amount but also helps to avoid tax.
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Leaving Out Certain Details on the Application
Being smart is a good thing, but trying to outsmart an insurance company is not being smart at all. Unless one is truly forthcoming on their life insurance application, there is a good chance to lose your insurance whole benefits, and deprive your family of the sole reason you chose the policy in the first place, i.e. its death benefits!