By Peter Boys, CAFA
The Financial Coach
1) A common mistake is underestimating the amount of income that can be earned from what appears to be a large amount of life insurance.
For example, a client died in 2015 at age 45, with a $2 million policy for his stay-at-home wife and three young kids. She was left with $1.75 million after paying off debts. This was invested at three per cent, giving her $45,000 per year to live on. This was not enough income, even with monthly rent from a basement suite. Today, a widow/widower would only earn about two per cent interest on a payout.
2) People don’t buy enough term insurance, disability and critical illness coverage to protect their family with replaced income if they become sick, disabled or die.
3) People often make the mistake of cashing out whole-life policies just to raise the needed funds when in a temporary cash crunch, ending up without coverage when it’s really needed as a consequence of that earlier decision.
4) Not buying enough of the right kind of life insurance for your specific needs.
5) Buying insurance that uses post-claim underwriting such as mortgage or creditor life plans. With post-claim underwriting, it is determined if you qualify for insurance after there is a claim.
Never buy mortgage insurance for a whole bunch of reasons, including the fact that the premiums on mortgage insurance stay the same throughout the term (five years, for example), but the payout, if there is one, shrinks with the mortgage.
I’m not a big fan of mortgage insurance and have never agreed to pay for it. CBC Marketplace has covered this type of life insurance many times. A lot of homebuyers make the mistake of not opting out when they sign up for their mortgage. They assume they have sufficient coverage with mortgage insurance and forgo buying inexpensive term life insurance. Then, when tragedy strikes and the breadwinner dies - the spouse is left raising the children on their own. The surviving spouse thinking he or she had the mortgage covered – until their claim was denied on some technicality. I had a client whose husband passed away. The two policies that were through the banks were denied and only his premiums returned. The personally owned policy through us was paid out.
6) Not buying enough when you start a family. It’s so cheap for a couple in their early 30s that it really shouldn’t be put off. You never know what will happen and the low monthly cost is worth the peace of mind you get.
7) Thinking that you are invincible and nothing will go wrong. Insurance isn’t just in case of death. You also need insurance for disability or critical illness. An incident can take all of your savings and wreck your earning potential.
8) Another big mistake is when people forget to change their beneficiaries in the case of divorce. It’s an invitation for future litigation when your ex and your new spouse claim the benefits on your death.
9) People who fudge their medical questionnaires or do not disclose information about pre-existing conditions are just asking for trouble.
10) This one needs to be mentioned again: Not buying enough life insurance or not buying any at all. Most people don’t want to think of their own mortality but, life Insurance is the most unselfish purchase someone can make because it’s not for you. Most people don’t want to think of their own mortality
Take the time to sit down with your advisor and sort through what your personal needs are. You insure your home, car and jewelry. It’s time to insure your family.