Bay
Financial Newsletter
7
Common Life Insurance Mistakes You Should Not Make
The
purpose of this commentary is to spotlight 7 of the most common mistakes
involving personal and business life insurance. Each has potentially
serious consequences in terms of expense and aggravation and each
can be avoided or, if found in time, corrected quickly and inexpensively.
There is a relatively simple solution to each of these common mistakes.
Who cares if these mistakes are not found and fixed? Certainly not
the IRS. It profits from the mistakes of omission or commission made
by others. The parties who care most about these mistakes are those
families, relatives, friends, businesses, and charities that must
make do with less – or do without!
Mistake 1: You’ve named your estate as your beneficiary.
Comment: Naming an estate as beneficiary of life insurance
typically dooms the proceeds (in most states) to needless state inheritance
taxes or to a higher rate than if the proceeds were payable to a named
beneficiary.
Mistake
2: You haven't named at least 2 "backup" beneficiaries.
Comment:
If your beneficiary dies before you do, even if only by minutes, and
no change is made to your policy’s beneficiary designation, the proceeds
will be paid to your estate. This would needlessly subject the proceeds
to all the problems of Mistake 1 just as if your estate were named
as beneficiary.
Mistake 3: Your policy proceeds are payable outright to minor
children or grandchildren or to a handicapped or emotionally immature
or financially irresponsible individual.
Comment: Improper disposition of assets is one of the most
frequent and serious of all estate planning errors. It occurs when
the wrong asset goes to the wrong person, at the wrong time, in the
wrong manner, or both. Consider the impact if tens of thousands of
dollars of cash were paid outright – tomorrow.
Mistake 4: You don’t check your policies at least every three
years.
Comment: An astounding number of policies are payable to ex-spouses
or others whom the insureds would not have wanted to receive the proceeds.
Children born after a policy was purchased are often inadvertently
omitted. Sometimes, the person named is long deceased.
Mistake 5: You own all the insurance on your life.
Comment: If your total estate will never exceed the federal
exclusion amount (currently $1,500,000), then federal estate taxes
may not be a problem. But if your estate is likely to be greater than
that amount over time, your ownership of insurance on your life may
lead to needless federal estate tax.
Mistake 6: The amount of personal coverage is inadequate for
your family’s financial security or estate planning goals.
Comment: With an ever increasing deficit, the federal estate
tax at this time is far from dead, and state death taxes can be very
high. Will your survivors have enough – after taxes, payment of debts
and other expenses – for food, clothing and shelter (in other words,
the bare necessities)? How about education?
Mistake
7: You haven’t checked to see if your employer, business, or practice
can provide insurance on a more efficient basis.
Comment: If you own, control, or have a voice in the decision-making
process of a closely or publicly held business, the use of business
dollars (as opposed to after-tax, out-of-pocket personal dollars)
may be much more cost effective (in terms of tax and cash flow) to
provide financial security for your family.
CONCLUSION: Life insurance is one of the most important purchases
you or your business will ever make. As is the case with any important
purchase, it is essential to avoid the pitfalls into which you can
so easily fall.
There's much, much more to this. Please feel free to call to discuss
these or other issues of interest!
