To some people, Talking about life insurance sounds as much fun as eating rotten fish. And while ignoring them can add to family tragedy by becoming a nightmare, more and more people are doing it.
A recent survey by the nonprofit Life Foundation showed that a quarter of Americans would consider canceling their life insurance policies to give money away in these tough financial times.
Before making such drastic decisions, consider these seven common mistakes - and you may decide to buy more coverage, not less.
The seven big life insurance mistakes
1. Think you have had enough. In a recent survey of middle-income Americans, all states found that while respondents generally agreed that everyone should have some level of life insurance, most believed it should primarily cover funeral bills and expenses. Only 20% said life insurance life should replace the income of the deceased, to continue to support the child and other dependent family members The idea of having a policy that pays seven to 10 times a person's salary - an amount that can easily make sense for someone who having young children - sounds like an attempt to sell a large, unnecessary policy to a respondent.
In fact, a third of adults have no life insurance at all, says Steven Weisbart, chief economist at the Insurance Information Institute. Of the rest of the people, many of them only have insurance that comes from their workplace policies, which is usually not enough for people who want to support dependents after their death.
2. Don't talk about it at all. "This is a topic that nobody wants to think about," said Matt Easley, vice president of Allstate Financial, partly because thinking about death was so uncomfortable.
Although life insurance is not compulsory like auto insurance, Weisbart says it is "morally obligatory," because "if you have dependents, you owe them to protect them from losing your ability to earn an income."
3. Rely on old rules. Traditionally, people have relied on the standard "sevenfold income" rule to calculate how much insurance they need. But that's not a useful measure, says Easley, because people's situations are so different. A single, independent person will probably need significantly less insurance than a person with five young children, for example. Instead, Easley recommends sitting down and thinking about "the things you want to protect." How much does it cost to support your children the way you want? To pay for their college or pay off the mortgage?
Michael Bonevento, senior financial adviser at Ameriprise Financial, also recommends making a "value of human life" calculation, which looks at the future economic costs of a breadwinner who dies. For example, if he earns $ 100,000 annually and has 20 years left until retirement, then the value is $ 2 million. (The tax is then deducted along with the amount the breadwinner consumes himself, and other benefits such as health insurance are added up. Finally, the present value of the figure is calculated.)
The value of human life is usually higher than what people think after considering what they would pay if they died. Bonevento recommends buying insurance for somewhere in between these two amounts. You can get started with a quick estimate using the MSN Money life insurance calculator. Or, if you know what you need, compare quotes directly.
4. Ignore your nonmonetary income. Many people, when adding up their income that needs to be replaced, forget about the benefits that come with their work, such as health insurance and retirement account payments. "I have a job, and my employer pays for my health insurance, but if I die, and the subsidy goes away, my wife will have to get health insurance without it, so it will be more expensive," Weisbart said. Life insurers, then, must pay enough money to cover a new health insurance bill.
5. Forgetting the long term. People often forget how long life insurance payments will take to support their children and other dependents after they die, says Easley. "If you have a child who is 10 years old, in 15 years, they will go out on their own," he explained, so in that case, the protection period that would provide support for 15 years is likely the most sensible.
6. Thinking that it is too expensive. Many people mistakenly think life insurance is prohibitively expensive, Bonevento says, but it's possible to find a policy that fits both your needs and your budget. Term insurance, which provides temporary insurance over a specific time period, is more affordable than permanent insurance, which lasts a lifetime. In addition to managing financial risk, people sometimes also use permanent insurance as an investment tool.
But those on a tight budget tend to choose term insurance. One of Bonevento's clients, a married man with one child and another on the way, decided he needed to take out $ 1.5 million worth of term life insurance. His monthly payment, pending an assessment of his health, will cost between $ 102 and $ 219 per month.
7. Forgot to update the policy. Even though a major life event, such as a child birth, marriage or divorce, usually means it's time to renew your insurance policy, many people forget to do it. Even the 9/11 attacks, which affected many Bonevento's clients, were not the motivator he thought they would be. Then, he said, "when tragedy strikes, they face financial problems above all else."
A recent survey by the nonprofit Life Foundation showed that a quarter of Americans would consider canceling their life insurance policies to give money away in these tough financial times.
Before making such drastic decisions, consider these seven common mistakes - and you may decide to buy more coverage, not less.
The seven big life insurance mistakes
1. Think you have had enough. In a recent survey of middle-income Americans, all states found that while respondents generally agreed that everyone should have some level of life insurance, most believed it should primarily cover funeral bills and expenses. Only 20% said life insurance life should replace the income of the deceased, to continue to support the child and other dependent family members The idea of having a policy that pays seven to 10 times a person's salary - an amount that can easily make sense for someone who having young children - sounds like an attempt to sell a large, unnecessary policy to a respondent.
In fact, a third of adults have no life insurance at all, says Steven Weisbart, chief economist at the Insurance Information Institute. Of the rest of the people, many of them only have insurance that comes from their workplace policies, which is usually not enough for people who want to support dependents after their death.
2. Don't talk about it at all. "This is a topic that nobody wants to think about," said Matt Easley, vice president of Allstate Financial, partly because thinking about death was so uncomfortable.
Although life insurance is not compulsory like auto insurance, Weisbart says it is "morally obligatory," because "if you have dependents, you owe them to protect them from losing your ability to earn an income."
3. Rely on old rules. Traditionally, people have relied on the standard "sevenfold income" rule to calculate how much insurance they need. But that's not a useful measure, says Easley, because people's situations are so different. A single, independent person will probably need significantly less insurance than a person with five young children, for example. Instead, Easley recommends sitting down and thinking about "the things you want to protect." How much does it cost to support your children the way you want? To pay for their college or pay off the mortgage?
Michael Bonevento, senior financial adviser at Ameriprise Financial, also recommends making a "value of human life" calculation, which looks at the future economic costs of a breadwinner who dies. For example, if he earns $ 100,000 annually and has 20 years left until retirement, then the value is $ 2 million. (The tax is then deducted along with the amount the breadwinner consumes himself, and other benefits such as health insurance are added up. Finally, the present value of the figure is calculated.)
The value of human life is usually higher than what people think after considering what they would pay if they died. Bonevento recommends buying insurance for somewhere in between these two amounts. You can get started with a quick estimate using the MSN Money life insurance calculator. Or, if you know what you need, compare quotes directly.
4. Ignore your nonmonetary income. Many people, when adding up their income that needs to be replaced, forget about the benefits that come with their work, such as health insurance and retirement account payments. "I have a job, and my employer pays for my health insurance, but if I die, and the subsidy goes away, my wife will have to get health insurance without it, so it will be more expensive," Weisbart said. Life insurers, then, must pay enough money to cover a new health insurance bill.
5. Forgetting the long term. People often forget how long life insurance payments will take to support their children and other dependents after they die, says Easley. "If you have a child who is 10 years old, in 15 years, they will go out on their own," he explained, so in that case, the protection period that would provide support for 15 years is likely the most sensible.
6. Thinking that it is too expensive. Many people mistakenly think life insurance is prohibitively expensive, Bonevento says, but it's possible to find a policy that fits both your needs and your budget. Term insurance, which provides temporary insurance over a specific time period, is more affordable than permanent insurance, which lasts a lifetime. In addition to managing financial risk, people sometimes also use permanent insurance as an investment tool.
But those on a tight budget tend to choose term insurance. One of Bonevento's clients, a married man with one child and another on the way, decided he needed to take out $ 1.5 million worth of term life insurance. His monthly payment, pending an assessment of his health, will cost between $ 102 and $ 219 per month.
7. Forgot to update the policy. Even though a major life event, such as a child birth, marriage or divorce, usually means it's time to renew your insurance policy, many people forget to do it. Even the 9/11 attacks, which affected many Bonevento's clients, were not the motivator he thought they would be. Then, he said, "when tragedy strikes, they face financial problems above all else."
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