With Halloween around the corner, children’s thoughts turn to candy and costumes. Their parents and grandparents should be focusing on more macabre matters — like the life insurance policies they bought (or are thinking of buying) to secure the financial future of these little ghosts and goblins if a key provider dies.
Though life insurance can serve various purposes, for most people, it is a tool for income replacement — to pay the mortgage or foot the bill for college if the unthinkable happens. Often a term-life policy, which provides a preset death benefit when the insured person dies, is all they need. Premiums for these policies, typically offered for 10- or 15-year terms, have fallen sharply in recent years.
But unfortunately it’s not enough to stuff the policy in a drawer and forget about it. Here are some potentially costly life insurance pitfalls that could escape your notice.
1. Rate increases. With a level premium, term-life policy, you’re guaranteed that the cost of the plan will not go up during the initial coverage period – for example, 10 or 15 years. But after that, watch out. When the stated period is up, you’re likely to get an invoice for the latest premium that’s many multiples of what you had been paying previously. Somewhere in the policy fine print there’s probably wording that says the policy is renewed automatically if the premium (meaning whatever you’ve been billed) is paid.
2. Affinity groups. Various professional associations offer life insurance to their members at group rates. They save you the trouble of shopping, but the price won’t necessarily be less than what you could find on the open market or through a reputable insurance broker. There is a hidden cost of buying insurance this way, too: In order to maintain the policy, you generally must keep your membership in the group current by paying the organization’s yearly dues. You may find yourself locked into the membership purely to maintain the insurance policy, even if professionally you’re not getting much out of the affiliation.
3. Beneficiary designations. This is a document given to an insurance company or financial institution indicating who should inherit certain assets that do not pass under a will or trust — such as retirement accounts and the proceeds of a life insurance policy. You fill out the form when you buy the policy, but can later amend it.
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