life-insurance

People underestimate the consequences and cost of mistakes made in the purchase of life insurance. Perhaps, talking about it is not pleasant and people just want to get it done quickly and forget about it. However, a poorly structured life insurance will most likely turn into a financial nightmare.

 

Life insure must be targeted to your specific needs

 

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Making your life insurance decisions based on what your friend purchased is not the brightest idea. Life insurance must be tailored to your circumstances and not to circumstances of your friend, “Uncle Joey” the “financial guru of the family”, or your insurance agent.

 

Here I share with you seven mistakes you should avoid when purchasing your life insurance policy:

 

1. Insurance owned by the insured – if the insured’s estate (including the death benefit from life insurance and retirement plans) will never exceed the estate federal exclusion amount, federal estate taxes may not be a concern. However, if your estate is at or above the exclusion amount, then all of the insurance proceeds will be taxable.

2. Inadequate coverage – this is probably one of the biggest mistakes people make. Many policies are inadequate for the current family financial security or estate planning goals. Maybe at the time the policy was purchased it was adequate. Remember that as your individual and/or family needs change so should your life insurance coverage. A couple of hours with a competent life insurance adviser will prove to be worthwhile. Your insurance policy should be evaluated at least every three years. Forgoing a once-every-three-years checkup may mean that you may not have the best possible type of policy to meet insured’s current situation or that the coverage is dangerously out-of-date and inadequate because of a change in circumstances. For example, insurance that was adequate ten years ago has, at an average annual inflation rate of 3%, lost 30% of its purchasing power.

3. Not re-evaluating your coverage – you will be surprised with the number of policies naming ex-spouses or others whom the insureds would not have wanted to receive the proceeds. Sometimes, children born after the issuance of a policy are left out. This happens because many policies are purchased and forgotten in a vault or a box in the attic. Write to the home office of the insurance company. Have the insurance company confirm in writing: (1) that the policies are in force, (2) who the current beneficiaries are, and (3) that waiver of premium (a contractual provision that assures a policy is kept in force and continues coverage even if the insured can’t pay the premiums because of disability) is effective.

4. Lying on the application – This is the worst thing you can do to your family. Common lies on life applications are about the use of tobacco and drugs, depression, and income (to qualify for higher coverage amounts). It is not worth it, a lie on the application is all a life insurance company needs to deny your claim.

5. Trusting insurance E-Quotes and cheap low cost mail out schemes – the Internet is filled with online calculators that will rapidly provide life insurance quotes. These tools are helpful but it only provides a general estimate. Why trust something as important as life insurance to a stranger who many times are not located in your area. If you have questions who are you going to talk to?

Cheap low cost insurance mail out should be avoided at all costs! Most of these schemes are very ‘simple’ life insurance policies that will only cover you for accidental death and NOT for any other death such as illness. Be wary of life insurance applications that do not ask you any medical questions. It is likely that these products will only cover you if you die from an accident. Also, you need to be very wary of the service you will receive at claim time.

6. Minors, emotionally immature or other impaired person named as beneficiaries – one of the most serious estate planning error is when the wrong asset goes to the wrong person at the wrong time in the wrong manner. It is foolish to pay a large sum of insurance money to an individual with no financial management experience or to an emotionally immature individual of any age. The best solution is to set up a trust for the insured’s spouse and children and name the trust as the recipient of life insurance proceeds. Under the trust you can set up a great deal of flexibility. This is a much safer and surer way to provide financial security for those who can’t or don’t want to handle large sums of money or other assets. Another option is to have the insurer pay out policy proceeds under a “settlement option” which provides a steady and consistent small amount of cash monthly over a long period of time.

7. Failure to name at least two ‘backup’ beneficiaries – if the named beneficiary dies before the insured (even if only minutes before), and no change was made in the beneficiary designation, the proceeds will be paid to the insured’s estate (See #1 above). Consider naming two backups for every person named in your life insurance policy as a beneficiary. Name more than two back-ups if the beneficiary is a “special needs” person who is physically, mentally, or emotionally challenged and consider naming one or more charities as ultimate beneficiaries in case the personal beneficiaries you’ve named pre-decease you.