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
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