Life insurance is a complicated but important type of insurance coverage. It mainly consists of two types – whole life and term life. Unlike other insurance plans, life insurance is only paid out after the death of the covered policyholder. Therefore, it is essential to get the right life insurance coverage and avoid costly mistakes, as rectifying them could prove next to impossible by the time a problem is discovered after death.
As the life insurance industry in Singapore is witnessing a sales boom for 2021, Singaporeans are paying more importance and attention to buying life insurance. Are they guilty of making these common mistakes in life insurance? And are you one of them?
If you’re currently looking for life insurance or recently purchased a policy, read on to make sure you don’t jeopardize your family’s finances by making these mistakes.
Mistake #1: Waiting to buy insurance
It is not uncommon for people to delay buying insurance policies. After all, buying life insurance is a complicated business. It is important to consider the amount of coverage you need as well as the cost. It is certainly not easy to make a decision with the plethora of life insurance options on the market.
However, buying a life insurance policy as soon as possible can work in your favor if you are looking to get a policy at the lowest possible cost.
Life insurance rates generally increase as people age or their health deteriorates. In some cases, illnesses or health problems may make you ineligible for coverage. The longer you delay the purchase decision, the more insurance is likely to cost. Delaying the purchase of a life insurance policy could cost thousands of dollars over a lifetime.
Mistake #2: Buying the cheapest policy
While it’s important to shop around for an affordable life insurance policy, the coverage you get in return is also crucial. Life insurance policies can be a bit complicated, and it’s a good idea to learn about their features and benefits.
Premiums for term life insurance are much lower than for whole life insurance, and for good reason. Term life insurance only covers you for a set period of time while whole life insurance covers you until death.
If you think you would need life insurance for a specific period, it would be best to purchase a term life insurance policy. On the contrary, if you are looking for lifetime coverage or want to hold a life insurance policy that creates cash value similar to that of investments, whole life insurance would be a better choice.
The cheapest policy may not represent the best value. There might be other insurers in the market offering much better coverage at a slightly higher price. It is therefore essential to assess the value of the life insurance plan you are considering or currently hold.
Mistake #3: Not paying the premium on time
You are expected to pay a premium in exchange for the coverage of your life insurance plans. These premiums are based on your insurance risk class, which takes into account your age, health status and more.
Failure to pay a premium can have serious consequences. Rather than a late 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 may be able to get the policy reinstated by paying an additional amount of money.
However, if you cannot do this, you will need to purchase a new life insurance policy. This could come with its own set of issues. Life insurance becomes more expensive as you get older, and even the difference of several years could lead to substantial cost increases. Any change in health status could result in increased premiums or even total ineligibility for life insurance. Finding a new life insurance policy would also result in a coverage gap, and your dependents would not be insured if something bad happened during this time.
Life can also throw unexpected twists at you; just like the recent events of Covid-19. Job loss, business failures or even serious illnesses could affect your ability to pay your insurance premiums. Therefore, it is advisable to balance the cover you need with a premium you can reasonably afford, even when everything has gone wrong.
How to avoid? Pay your premiums on time! Make sure you have sufficient funds in your bank account if you pay by GIRO, or set a monthly/yearly reminder to make the 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’s easy to underestimate/overestimate the amount your beneficiaries will need to maintain their current standard of living if something unfortunate happens to you. 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. Next, consider what assets you have, such as savings, and whether they are able to cover those costs. The difference between your assets and your obligations is the gap that life insurance must fill.
As a general rule, it is advisable that your life insurance coverage be at least 10 to 15 times your current income. However, this is only a rough estimate. Depending on your financial situation, this number may be higher or lower.
Mistake #5: Not reassessing your needs
Most people would have their life insurance policy for a while, and there would be a lot of changes during that time. Your life insurance needs will be very different when you are 20, 40 and even 60 years old. These changes in circumstances would mean that it is necessary to modify your life insurance policies or your life insurance beneficiaries.
Determine if you need more coverage to meet the growing needs of your beneficiaries or less coverage due to the amount of money you’ve raised over the years. Consider your budget and needs carefully before purchasing any other policy to ensure you have the coverage you need at the right price.
If there are any changes to your dependents, update your life insurance policy accordingly when those changes occur. This ensures that those who rely on you do not lack vital protection, should something happen to you.
Mistake #6: Borrowing from your font
Life insurance policies that accumulate cash value could be a source of funds when you need cash. The cash value of a permanent or whole life insurance policy can generally be used for any purpose, including tax-free withdrawals and loans, if done correctly. Policy loans are borrowed against the death benefit, and the insurer uses the policy as collateral for the loan.
This is a great advantage, but it must be carefully managed. If you withdraw too much money from your policy and your policy lapses or runs out of money, any winnings you have withdrawn will become taxable. Not to mention that you would significantly reduce the death benefit available to your beneficiaries.
If you have withdrawn too much money and your policy is about to expire, you may be able to maintain the policy by paying additional premiums, assuming you can afford it. When accessing the cash value of your life insurance policy, be sure to monitor it closely and consult your financial advisor to avoid any unwanted tax liabilities.
Buying life insurance policies is a complicated business, but we’re here to make it easy. Keep these 6 common mistakes in mind before, during and even after your purchase.
Consider getting your insurance at an earlier age, when it’s more affordable. Select sufficient coverage at the right price and pay your premiums on time. Reassess your needs from time to time to make sure you have enough coverage. There are no rules that prohibit you from having multiple life insurance coverage, so go for it if the need arises. Avoid borrowing against your life insurance policies and make sure you can manage them wisely when you do.
If you’re still not sure how much cover you need, check here for a more personalized quote from our experts.
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