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Life Insurance Don'ts
by Dwight Wanken (Write for us!)
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Life insurance can play an important part in an individual's overall financial plan. Here
are a number of common practical mistakes that could prove costly yet are easily avoided.
- Naming the estate as beneficiary
This brings the policy proceeds back into the probate estate where it will be subject to fees and expenses, inheritance taxes and creditor claims.
- Failing to name backup beneficiaries
Without backup beneficiaries, if the original named beneficiaries die first, it's back to mistake #1. It might be a good idea to do this with other tools as well such as wills, trusts, and retirement plans.
- Failing to do insurance policy check-ups
It's a pretty solid strategy to review policies every few years or so to look for changes in needs as well as changes in the family.
- Mismatching the product with the problem
Check-ups will often point out situations where there is the wrong type of policy for current needs, new types of policies may address needs better, or the old needs have changed.
- Inadequate coverage for family security
Family needs change over time. Analysis of survivor needs upon death or disability of a spouse, as well as the spouse's expected lifestyle, could provoke policy updating.
- Policy payable outright to minors
Guardianship or custodian proceedings can be a burden for survivors. Look into a trust or a settlement option with restricted payouts to provide for minor children.
- All life insurance owned by the insured
Where there is a taxable estate, the insured might as well have named the IRS as a partial beneficiary. Getting it out of the estate through outright gifts or through a trust and then donating cash annually that can be used to pay remaining premiums can be a significant wealth preserver.
- Not maximizing business-sponsored benefits
Where individuals have some control over a small, closely held business, they should look into the cash flow and tax-effectiveness of the business providing the insurance. Consulting a professional in this area is a wise move.
- Overusing term insurance
Remember, term insurance runs out eventually while it also becomes more expensive. Re-evaluate needs and see if permanent products can address them better as time passes.
- Buying life insurance as though a commodity
Not all life insurance contracts are alike. The lowest price and the highest return do not necessarily mean it's the best policy. Service and experience of the agent as well as strength of the company are more important.
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