Life Insurance - Some Of The Most Common Mistakes

Some of the most common mistakes made with life insurance are:

  1. Not having any life insurance at all!
    Lots of people simply overlook the importance of life insurance. Life insurance may not seem to be something they need at the time and it can incorrectly be viewed as just an added expense. However if you actually stop to consider all the people most important to you in your life and how would they be impacted financially if you weren’t there, that is when it starts to make sense. Hopefully you can begin to understand that life insurance is a critical tool to ensuring that your family will be financially supported should anything happen to you. Keep in mind that if you have any outstanding debts or other financial obligations, a life insurance policy can create a “tax free instant estate” to cover all those expenses and more. Remember, it is also important to get life insurance sooner rather than later because the cost can increase exponentially as you age.

  2. Relying only on employer provided workplace life insurance or group insurance
    Several questions you want to ask yourself (or ask your HR representative, if you don’t know the answers):
    --Is your employer sponsored life insurance plan “portable?” Meaning: Do you have the option to take the plan with you when you leave? (Regardless if you are fired, you quit, or you leave for any other reason.)
         -If your plan is portable, another question to ask: Will you be guaranteed to keep your current premium or will you have to go through underwriting when you leave your company to determine your new premium amount? If you need to go through underwriting, that may make your premiums much more expensive depending on your age and health at that time when you leave your company.
         -If your plan is NOT portable and you still want to continue being covered, you would have to purchase a new individual life insurance policy when you leave your employer. Which could be very costly depending on your age and health. (That is if you can even get approved at that future time.)
    --Who is responsible for the premium payments? You or your employer? 
         -If you are responsible for the payments, do you have guaranteed level premiums for the rest of the policy term or do your premiums increase annually, like the majority of employer sponsored plans do?
    --Is the death benefit a fixed amount or a multiple of your salary? Does the multiple increase to a higher tier level if you get promoted?

  3. Only considering term (temporary) life Insurance
    The two main types of life insurance are permanent life insurance and temporary life insurance.

    Term insurance is generally known as “temporary" insurance because it only provides protection for specified number of years. (Example: 10, 20, 30 year terms are common options). Then when that term life insurance policy term expires, you do not have any cash value built up.  If you still want life insurance, you will need to purchase a new policy at considerably higher rates due to your older age and possibly health issues at that future time. (If you have major health issues at that time, you may not even be eligible for a new life insurance policy!)

    Permanent life insurance can provide protection throughout your lifetime and may build cash value at the same time! Permanent Life Insurance can provide guaranteed lifelong protection (or to a specific age) as long as the necessary premiums are paid. A nice feature is that after a pre-determined period, many times premium payments can even be made from the cash value of the policy depending on how the policy was set up. To read more, click on these web links below:

     Life insurance - Advantages Of Permanent Life Insurance

     Life Insurance - Whole Life Insurance vs. Term Life Insurance

  1. Rate increases
    With a level premium term life insurance policy, you are guaranteed that the premiums will not increase during the initial coverage period. However after that initial coverage period, watch out since premiums may skyrocket. When the stated period is up, you are likely to get an invoice for the latest premium that is many multiples of what you had been paying previously.
    One the other hand, with a permanent life insurance policy the premiums may be set to be level (not increase) for your "entire life" as long as you continue to make your payments on time.

  2. Beneficiaries
    Listing beneficiaries is a part of the initial insurance company application process indicating who should inherit the death benefits of your insurance policy. You fill out the form when you buy the life insurance policy, but beneficiaries can later be revised by contacting the insurance company in writing. It is crucial that you keep these beneficiary designation forms up to date. You should review your life insurance policies annually or whenever there is a major life events, such as having a new baby, a divorce, a new marriage, spouse passes away before the insured on the policy, etc.

  3. Procrastinating and/or being under insured!
    Almost 1/3 of Americans think they need more life insurance, and 43% say they would feel a financial hit within six months if their family’s primary wage earner died, according to the 2015 Insurance Barometer Study by industry groups LIMRA and Life Happens. Yet 54% of Americans don’t plan to buy life insurance in the next 12 months.
    If you need life insurance, it’s better to buy sooner rather than later. Life insurance rates increase as you age and develop health conditions. That is if you can still get approved, since if you have major health issues at that time, you may not even be able to get approved for a new life insurance policy!

  4. Naming a minor as a beneficiary
    You might buy a life insurance policy for your children’s benefit, but naming them as beneficiaries on the policy while they are still minors is a very bad idea. If you die before they have reached legal adulthood, the life insurance company can’t pay benefits until the court appoints a guardian. That takes time and money for attorney fees and court costs. Plus the money decisions of the minor will be in the guardian’s control. Instead, name your spouse or other trusted adult as the beneficiary. Or better yet set up a life insurance trust for your children, and name the trust and trustee as the beneficiary on your life insurance policy. You can stipulate how the money should be used. Then when they become of legal age, you can always revise the beneficiaries by contacting the insurance company in writing at that time.

  5. Don’t keep your life insurance policy a secret!
    Many people don’t like to talk about their personal finances, even with their close family members. However somebody needs to know about the life insurance policy, so that the beneficiary can make a claim if/when the time comes. People with a good reason to know about your policy should be: your spouse, adult children, financial advisor, an estate planning attorney, and anyone you appoint in your will as the personal representative or executor of your estate.

  6. Naming your estate as a beneficiary.
    The mistake of naming your estate as beneficiary of your life insurance policy condemns the proceeds (in many states) to needless state inheritance taxes or to a higher rate than if the proceeds were payable to a named beneficiary. This mistake also allows that creditors will have full access to the life insurance proceeds even though most states’ laws provide full or significant exemption from the claims of creditors for life insurance payable to named beneficiaries such as a spouse, children, parent or sibling. So by the mistake of naming your estate as your beneficiary, you guarantee that the precious dollars you wanted to go to a loved one will be subjected to the expense and potential aggravation and delay of probate.
    The solution would be that you should change the beneficiary of your group insurance at work and your individually owned policies to the persons or organizations you really want to receive it. That way you can legally cut out the tax middleman and others whom you don’t want to be recipients of your life insurance.

  7. You didn’t list at least two contingent beneficiaries on your life insurance policy.
    If the beneficiary you named dies before you do (even if only minutes before you), and you hadn’t named other beneficiaries, the proceeds will be paid to your estate. This needlessly subjects the proceeds to all the problems of the above paragraph, just as if you had named your estate as your life insurance beneficiary.
    You should name at least list two contingent beneficiaries for every person named in your life insurance policy as a beneficiary.

  8. You don’t check your life insurance polices annually for any changes that may need to be made to keep them up to date.
    For example: Many policies are payable to former spouses or others, whom the owner of the policy would not have wanted to receive the proceeds. Children born after a policy was purchased are often inadvertently omitted. This can happen because it’s easy to forget whom you named as the beneficiaries of your life insurance many years ago. Forgoing an annual checkup also makes it likely that you may not have the best possible type of policy to meet your present needs. So check your life insurance policies annually (or better yet have your agent sit down with you and review together) to see if the beneficiaries named are the people you still want currently as your beneficiaries and also that the policy proceeds are payable to them in the manner that best meets their needs, abilities and circumstances. Lastly, check to see if you still have the best possible type of policy and coverage amounts to meet your present needs.

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Note: Life Insurance information can be confusing to many people. As an "independent licensed agent" I can explain things to you in simple terms so you feel comfortable making a decision. Then I can help you choose a life insurance policy, from many choices of different insurance companies, that you feel fits your needs. Plus if you choose to work with me you will have personalized service by a local agent that can shop premium quotes for you. If you would like my assistance to discuss and/or start the process of getting you insured please call me at 941-404-5334. 

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