Life Insurance - 6 Prevalent Mistakes

1. Delaying. The lowest life insurance premiums that you will ever pay are the ones you qualify for today. As you age, your premiums will rise. The reasons are obvious: Younger people are healthier than older people are, and they are expected to live longer. With lower risk comes lower cost. Even if buying life insurance for a set amount of time—term life insurance—the cost goes up with your age. Fast Fix: Buy now.

2. Paying with after-tax dollars. You might be able to pay for life insurance with pre-tax dollars. Many employers offer a Flexible Spending Account (FSA), or Section 125 plan, that allows employees to place money into an account before paying federal and state taxes. The FSA funds can be used to pay for qualified expenses, including life insurance. By paying with pre-tax dollars, you will enjoy about 34% more buying power, since you will not have had 20% federal income tax, 7.65% Social Security tax, and 6.5% state income tax withheld from your FSA dollars. Fast Fix: Find out if you qualify.

3. Leaving the money to your estate. Death benefits are tax-free when paid to individuals, but not when paid to an estate. If you make your estate your beneficiary, you open up your death benefit to costly inheritance taxes. You also place the death benefit in probate court, which will decide who the beneficiary(s) will be. Tied up in court, the death benefit will not be available to meet immediate expenses, such as a funeral, a house payment, a car payment, or anything else. Fast Fix: Make a loved one the beneficiary.

4. Listing just one beneficiary. You may want the entire benefit paid to one person, but what happens if that person dies with you or before you? The benefit will be paid to your estate, taxed, and tied up in probate. Fast Fix: Name back-up beneficiaries.

5. Getting too little coverage. Chances are your death benefit will not be paid for quite awhile—hopefully not until far into the future. What will it be worth then? If you calculate in today’s dollars, you will leave behind a death benefit that is too small. Fast Fix: Get as much life insurance as you can reasonably afford.

6. Outliving your term life insurance. Term life insurance is less expensive than whole life insurance because it covers a predetermined period, or term. That term may be as much as 30 years. When the term ends, so does your coverage. Outliving your term is a good thing, but a better option might have been to get whole life insurance, which covers you for your whole life. Whole life has higher premiums than term life does, so it does not work for everyone. Fast Fix: Discuss the benefits of term life and whole life with your insurance agent.

Bradley Steffens is a copywriter and the author of twenty-eight books. He has written for a range of clients in the financial, healthcare, and high tech industries, including Raymond James Financial, Cardinal Health, and Del Tel, Inc. His latest book is a biography of the medieval Arab scientist, Alhazen.