Life insurance plays a crucial role in most families' estate and/or financial plans. Because of this, it's'important to ensure your insurance policies are set up correctly. Making one of these ten common mistakes can derail an otherwise flawless plan, resulting in a failure to accomplish your goals, creating problems for the next generation, and possibly jeopardizing the relationships between your heirs.
1. Naming a Minor Child
Life insurance carriers won't pay a life claim directly to minors. If you haven't made other arrangements via a trust or Will, the court will appoint a guardian - a costly process - to handle the money until the child reaches the age of majority in your state.
Instead, consider whether there is a reliable adult that can inherit the funds and manage them for the child, or set up a trust to benefit the child and name the trust as the beneficiary of the policy. Another option would be to name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minors Act. If necessary, consult an estate attorney to decide the best course.
2. Forgetting you Live in a Community Property State
While it's possible to name anyone with whom you have a relationship as your beneficiary, in a Community Property state you will typically need the spouse to sign off on the designation of any non-spouse, primary beneficiary.
These are all Community Property States:
3. Assuming the Will supersedes the Policy
Many assume their Will will govern the distribution of their life insurance proceeds. But life insurance is a contract. Regardless of what the Will says, the life insurance benefits will be paid to the beneficiary named in the contract.
4. Accidentally Disqualifying a Beneficiary from Government Benefits
Naming a child with special needs, or other lifelong dependent, as the beneficiary can put them at risk of losing government assistance.
Instead, consider consulting an attorney to help you set up a special needs trust, and name the trust as beneficiary.
5. Voiding the Tax Advantages of Life Insurance
Usually death benefits are income tax free. However, in a situation where three different people are the owner, insured and beneficiary - such as a wife owning a husband's policy, with their child named as beneficiary - the death benefit could count as a taxable gift to the beneficiary.
6. Only Naming a Primary Beneficiary
You may want to simply name your spouse as beneficiary and will not have given any thought to what happens if you predecease your spouse, or even if something were to happen to both of you at the same time.
When there is no living beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. That leads to two complications. One, heirs might face a long wait to get the money. Two, the life insurance proceeds, which normally would be protected from creditors, can now be open to creditors' claims.
Always walk through the thread of beneficiaries from primary to contingent, to final, and make sure you are leaving no gaps.
7. Keeping it a Secret
It's always important to make sure the next generation is aware that an estate plan exists. This gives you a chance to make sure your wishes are fully understood, heads off any confusion, and makes sure that the beneficiaries know there is a policy, and where to find it.
We've all heard that the best life insurance policy to own is the one that pays when you die. Make sure your heirs benefit from your hard work.
8. Forgetting to Update
Naming a beneficiary is not a "set it and forget it" event. Beneficiaries die, second and third marriages occur, or your wishes may simply change. If you have a life insurance policy collecting dust, pull it out and double check your beneficiary designations.
9. Attaching No Strings
Naming young-adult children as beneficiaries of large sums of money can be a recipe for financial disaster. What 18-21 year old can handle an influx of a million dollars in cash?
Consider the possibility of establishing a trust that lays out the specifics of how the money can be used until the beneficiary reaches a certain age.
10. Neglecting Details
Your life insurance policies are legal contracts - make sure they are worded correctly. Rather than naming "Children of the Insured" as beneficiary, it's preferable to list them by name, with social security numbers and addresses. This ensures that the beneficiaries can be located, identified, and helps preclude surprise beneficiaries.
Also indicate whether the children should inherit "per stirpes" or "per capita".
Have question? Give us a call or email us, and we'll be happy to help.
As your life changes, your insurance should change with it. Anyone can, and should, benefit from a life insurance policy review a minimum of every three to five years. Even if it's been less time than that, though, you should consider reviewing your coverage if you've had a life changing event. Here are five common examples.
1. You’ve had a child. The cost of raising a child through age 17 is $233,610, according to 2015 data from the U.S. Department of Agriculture—and that’s not even mentioning college costs if you plan to help out.
If you’ve recently had an addition to your family, your spouse or partner may not be able to afford those costs if something were to happen to you. That’s especially the case if you’re the financial breadwinner.
2. You’ve bought a new home. Two of the top five reasons people get life insurance is to cover mortgage debt and to pay for home expenses, according to the 2018 Insurance Barometer Study by Life Happens and LIMRA.
If you have a family, the last thing you want is for them to be forced out of their home because they can’t keep up with the payments. So, if you just bought your first home or a new home with a bigger mortgage, make sure you have enough coverage to at least make the monthly payments.
3. Your income has increased dramatically. Two-thirds of people who own life insurance bought it to replace lost income if they were to pass away, according to the same Barometer Study. If you’ve recently gotten a significant raise or your income has increased steadily since you last bought insurance, check to make sure your insurance coverage is still enough to replace it.
4. Your lifestyle has changed. While income increases often come with lifestyle changes, it’s also possible to get a lifestyle upgrade after you’ve paid off debt or improved your cash flow in some other way. If you notice that you’ve been spending more per month than you were a year or two ago, your current life insurance policy may leave a gap between its coverage and your loved ones’ needs.
5. You’re thinking about your estate planning. Another top-five reason people get life insurance is to transfer wealth or leave an inheritance. As you get older, you may start thinking more about what kind of legacy you want to leave behind.
If you’ve been focused on other life insurance needs up to this point, it might be time to take another look to see if you would owe any estate taxes upon your death or what other expenses your estate might incur. You may also consider whether you want to leave any money behind for your children or a favorite charity.
If one of these things has happened to you and you’re not sure if you need to increase your coverage, use our comprehensive life insurance calculator to see how your needs have changed.
In most cases, you won’t be able to increase the coverage on your current policy. Instead, you’ll buy a new one to supplement the first. You can do this by reaching out to your insurance professional or shopping around to see if another insurer might offer you a better deal. If you contact us, we can put you in touch with a qualified insurance professional.
Whatever you do, take the time every once in a while to determine whether your life insurance coverage is still enough to take care of the people you love.
Greg Stadler is a veteran life insurance agent and marketer, located in Green Bay, WI.