Making decisions about life insurance can feel perplexing. While insurance companies offer an abundance of options, you still have to navigate the ones you qualify for and fit your family’s budget.
You may have already researched a certain type of life insurance and wondered if it would be useful to your family in the event of a premature death. Although no one wants to think about such tragic circumstances in their family, having the right type of insurance could save your family from even more stress if that event occurs.
Explore five of the most common life insurance mistakes to avoid as you weigh your options.
In this article
1. Buying Only Mortgage Life Insurance
Mortgage life insurance is a type of policy that ensures that your mortgage is paid off in the event of your death. This allows the family to stay in the house after the death of a loved one. Your family won’t have to continue paying the mortgage or move in the event they can’t afford it without your income.
Many parents want to keep their children in the same home throughout their childhoods, so these policies might seem tempting to purchase. While this can benefit your family’s stability in many ways, mortgage life insurance may not be a necessity for your family.
Unfortunately, 25% of Canadian parents make the mistake of depending solely on mortgage life insurance. Here’s why this type of life insurance isn’t everything you need:
- Your family will not receive any payouts to use for funeral expenses, bills, or other necessities. Instead, a lender will receive the payout to pay off the rest of the mortgage.
- Mortgage life insurance can also be far more expensive than a more flexible life insurance policy.
- You must get a new policy to match the new circumstances if you want to refinance or go with a different lender because the policy you currently hold won’t transfer.
If you want mortgage life insurance, make sure you are happy with your current mortgage circumstances across the board. You also want to ensure you can afford it along with a supplemental type of life insurance policy.
While your family can remain stable in their current location, you should not use it as your primary life insurance policy. Thus, mortgage life insurance is not a necessity but an extra financial cushion. Do not rely on mortgage life insurance alone if you want to leave a flexible financial situation for your family. Insurdinary.ca has laid out the fundamental differences about the differences between life and mortgage life insurance in this publication.
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2. Purchasing Permanent Life Insurance Instead of Term Life Insurance
Permanent life insurance is a collection of policies that offer coverage throughout the entirety of the policyholder’s life. It ensures that a person’s dependents and debt are taken care of if the policyholder passes away.
Permanent life insurance sounds enticing to young Canadian parents, as about 22% purchase a permanent life insurance policy. If there is money available to their children and pay off debts, then their family should be set no matter what. Since many young parents are dealing with a mortgage and dependents, they view permanent life insurance as a necessity, but this is one of the most common life insurance mistakes.
In reality, you may not need to purchase permanent life insurance for your family. It has several drawbacks that include paying for it for the rest of your life. Eventually, you and your family will likely pay off your mortgage and other incurred debt. Additionally, your children will grow up and no longer be dependent on you. At that point, you won’t need the same level of coverage as when you took out the policy, but you’ll be stuck with the high premiums.
Permanent life insurance premiums can cost five to fifteen times more than simpler options like term life insurance. Plus, these policies tend to be extremely complex with an elaborate underwriting system. Underwriters will leave no stone unturned when providing you with a policy, making for a deeply invasive process.
You may wonder if there is any event in which a permanent life insurance policy would benefit your family. Generally, this type of policy only helps very wealthy individuals or elderly people. In most cases, term life insurance is a better, more affordable option.
Even so, you should still seek further advice to see if permanent life insurance is a good choice for you. Doing so could save you money and precious time better spent with your children.
3. Buying Kids Their Own Life Insurance Policy
If you’ve considered taking out a life insurance policy on your child, you’re not alone. A fourth of all Canadian parents have had the same thought. Life insurance for children is usually a kind of term life insurance that parents will buy in case their kids pass on.
If you have life insurance for your child, you will pay a premium each month. In turn, your insurance provider will provide a sum of money if your child passes away. Many parents will use this sum to cover the costs of the funeral arrangements and take time off of work to grieve.
Fortunately, most parents will never have to think about their child’s untimely death as dependents. But that means that taking out a life insurance policy is not the wisest investment a parent could make in their children’s futures.
If you choose life insurance for your kids, you will spend money each month that your family may well never see again, so it usually isn’t worth it. Consider when your children turn 18. You won’t see the money you spent on their policies as kids ever again. There are better, more dynamic ways to invest your money in your children.
For example, you can set up a savings account into which you deposit money every month. This money could eventually help you with any unforeseen circumstances involving your child in the future. It can also provide a way to fund your child’s future. When you go for an option like this, you are not paying money that you may never see again.
The only circumstance where you may benefit from a life insurance policy for a child is if your child has a severe health condition that makes future circumstances difficult to navigate. The role of life insurance for kids and the benefits can be further explored here.
4. Relying Completely on Group Life Insurance
Group life insurance is a type of life insurance that a business provides to its employees. Over half of all Canadians with a life insurance policy get it from these plans through their employers.
Group life insurance is attractive because you will get it at an affordable group rate. This means lower monthly payments than many other providers will offer. Therefore, many parents will rely solely on their group life insurance for coverage. But this can lead to several problems in the long term.
Group life insurance may not be as permanent as you’d like. If you lose or find a new job, you will have to get new life insurance. Group life insurance won’t travel with you. If you find a new job, it may tick off all the right boxes as far as salary and other benefits. Some jobs don’t offer group life insurance at all.
Even staying with your current position until you retire is no guarantee that your policy will cover your family. Some employers will decrease or completely do away with group life insurance. Once you hit retirement, you’re no longer covered.
In the event you do pass away, group life insurance will only pay out up to one or two times your annual salary in most instances. Many families find that this doesn’t cover necessary expenses.
Therefore, you should not rely on group life insurance as your sole policy. If you do, you could be making one of the most common mistakes when it comes to life insurance. While it’s certainly helpful to have, group life insurance can be both temporary and inadequate for your family’s needs.
If you have group insurance, you will benefit from taking out an additional term life insurance policy. Make sure you treat your group life insurance as supplementary rather than primary. Doing so ensures your beneficiaries have access to the money they deserve in the event they lose a source of income. Also, many people don’t realize that there are options to convert their group life insurance policy into individual plans upon their departure from their jobs. Groupenroll.ca does a fine job of explaining how that process works.
5. Not Buying Life Insurance At All
Some parents make one of the worst life insurance mistakes: skipping life insurance altogether. Maybe they are overwhelmed with the options and aren’t sure where to begin. Raising a family consumes time and energy, and they would rather not spend it shopping for insurance. Perhaps they don’t want the added financial burden of monthly payments. Whatever the reason, skipping out on life insurance altogether isn’t beneficial to the people you care about the most in the long term.
While you may have a small sum of extra money in your pocket each month, your family’s financial situation stays unprotected in the event you pass away unexpectedly.
Funeral costs add up, and bills continue coming no matter the circumstances. Your spouse and kids will be unable to support themselves or grieve in peace. In addition to funeral costs, they’ll have to manage groceries, utilities, mortgage, and a whole host of other piling expenses as they try to stay afloat financially.
Even if you struggle financially, you have many affordable options for life insurance available to you. Term insurance is one of the best options as its underwriting is succinct and clear, and the benefits it provides go further than other choices. Even with a small budget, you can find inexpensive plans that start below $25 for monthly premiums. It’s the perfect way to make sure your family’s finances stay in order no matter what happens.
Read On To Learn Even More About the Benefits of Life Insurance
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Make Smart Choices About Life Insurance with Alliance Income Services
With Alliance Income Services at your side, you’ll be making the best decisions for your budget and family and avoid the most common life insurance mistakes that many people make every day. Canadian parents need life insurance to protect their family’s financial future regardless of the circumstances. Get your free quote today to start shopping around for your perfect fit. We’re ready to guide you to the smartest choice for your family’s needs.