Making a mistake with life insurance can hurt the ones you love most. Fortunately, with some advance preparation and careful thought, these costly errors may be avoided. Here are some of the most common life insurance pitfalls we see:
1. Choosing the Cheapest Policy
Everyone wants to get a good deal on insurance, but picking the life insurance policy with the lowest premium might cost you (or your family) a lot more later if it’s not the right policy for your needs. We help clients by reviewing their needs so they understand which insurance makes sense for their life. This can help you avoid paying for more insurance than you need. We help clients consider:
- What is the right kind of insurance for my situation?
- Is the death benefit enough for my family’s needs?
- What will happen when my insurance needs change?
AMONG THE LIFE EVENTS THAT SHOULD DEFINITELY TRIGGER AN INSURANCE REVIEW ARE MARRIAGE, DIVORCE, THE BIRTH OF A CHILD, PAYING OFF THE MORTGAGE, AND RETIREMENT.
2. Failing to Review Your Life Insurance Regularly
Like everything else in your financial life, life insurance isn’t a one-and-done proposition. It’s very important to review your policies occasionally to help make sure they still meet your needs. In the worst cases, an out-of-date insurance policy can lead to problems for your family when they need help the most.
The life events that should definitely trigger an insurance review are marriage, divorce, the birth of a child, paying off the mortgage, and retirement. A comprehensive life insurance checkup should help you answer the following questions:
- Is my policy still in force?
- Are the beneficiaries current?
- Who owns the policy?
- Do I have the right kind of insurance for my current and future needs?
- Is my policy still competitive?
3. Naming Your Estate As Beneficiary
One of the primary advantages of life insurance is that beneficiaries can receive death benefits quickly. Unfortunately, if you name your estate as beneficiary, your loved ones will lose the ability to collect directly from the insurance company. Instead, they’ll have to go through the probate process and might owe estate taxes on the death benefit. Any creditors you have might also be able to lay claim to the benefits if those benefits are part of your estate. In many states, life insurance proceeds are shielded from the decedents’ creditors when they go directly to beneficiaries.
You may avoid creating trouble for your loved ones by specifically naming the beneficiaries you want to receive the death benefit and updating them regularly. Consider including backup or contingent beneficiaries in case your primary beneficiaries predecease you.
4. Failing to Insure Your Spouse
Many people make the mistake of thinking that only primary earners or working spouses need to be insured. They make the mistake of thinking life insurance is all about income replacement. However, take a moment to think about the value of the labor a non-working spouse provides. Does he or she:
- Serve as the primary caregiver for children or adults?
- Work as the family chauffeur?
- Do laundry and maintain the house?
- Run errands?
Though this work might not earn income, it is critical to a family’s wellbeing. In the event of your spouse’s death, it’s likely that you would have to take time away from work or pay for these services.
5. Relying Only On Your Employer-Provided Life Insurance
Many workers get group-term life insurance as part of their employee benefits packages. While a term policy is an excellent perk that can help protect your family, the death benefit provided is often small and usually not enough on its own. The coverage will also typically end if you leave the company, leaving your family without that financial cushion. A private policy has the benefit of being portable and completely customized to your needs.
Life insurance is an important tool in financial planning, but mistakes can be costly. One of the benefits of working with our team is that we can review your entire situation and make recommendations about the role life insurance should play even though we don’t sell insurance. When you’re ready to move forward with life insurance, we then put you in the hands of an insurance team that we have carefully vetted. If you have questions about life insurance or want to discuss how insurance impacts your financial planning, give our office a call at 913.814.3800.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Originally published on April 7, 2016 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.