You’ve worked hard to create a lifestyle for yourself and your family. Life insurance is there to protect it when you are gone. Unfortunately, the Federal Government would like to get as much of that cash as they can through death taxes. There are 7 major errors that people make when setting up policies. I’m going to make sure you dont’ make those mistakes.
You’ve got the wrong insurance.
Short term life insurance may be cheaper on the surface, but it may not be the right choice for you. Whole life policies offer greater flexibility and the added security that they never run out. This doesn’t mean that a short term policy might not be right for you in your present circumstance. It is best to list all of the major advantages and disadvantages of each policy before deciding to exclude anything from the list.
You’ve named your estate as the beneficiary.
If you name your estate as the beneficiary of your life insurance policy this opens it up to claims from any and all creditors that may have a claim against you – claims that would otherwise be eliminated by your death. In addition, the IRS can claim a considerable amount of death taxes from your estate that would have been eliminated had you chosen direct beneficiaries. Fix this by naming direct beneficiaries so there is no financial double dipping by the tax man.
You haven’t named back-up beneficiaries.
It is very important that you name back up beneficiaries or place a provision in your insurance that all funds are distributed among the surviving group of named beneficiaries. If one of your beneficiaries dies before you and you fail to update your policy, the money will go to your estate and be subjected to all of the previously mentioned places.
You named a minor as a beneficiary.
Minors are notoriously short sighted. By leaving them large lump sums of cash that they may not be ready for, you might be setting them up for catastrophic failure. If the minor is too young to understand the value of the assets they have been given, it is a better idea to create a trust fund for them that will provide for their needs and eventually pay out to them at a specified age.
You don’t have enough coverage.
This is one of the most common problems that I see on a day to day basis. The average cost to raise a child to the age of 21 is about $250,000. That’s just one child. That doesn’t include the debts that you may owe on houses, cars, or other large purchases. Is your coverage adequate to cover this and still allow your family to keep living the lifestyle you’ve built for them? Only a financial analysis will tell.
In addition to making sure you have the right amount of coverage, consider adding a year of gross income to your immediate benefits. This “Survivors Shock Absorber” gives your significant other time to adjust to living without you.
You own all the coverage.
If you have a large estate, owning all of the coverage yourself can create a situation where the federal and state governments tax your benefits, regardless of the way you have set up your policies. If this is the case, consider having policies taken out by your significant other, children and even your company in your name. If you haven’t ever owned the policy, it cannot be taxed as part of your estate.
You don’t have the right adviser.
The biggest problem that you have when dealing with your life insurance policy is bad advice. You have to deal with someone you trust and that has experience in these issues. Life insurance isn’t just a commodity to buy – it’s a long-term investment in your family’s future.
To learn more about how to choose the perfect life insurance policy for your needs, visit our life insurance page or speak with an adviser today.