Life insurance is a great way to secure the financial future of your loved ones, but there are some downsides to be aware of. Let’s look at some pitfalls related to life insurance that you should know about and avoid.
Mistake 1: Naming your estate as the beneficiary.
By doing this, you make the proceeds from the life insurance subject to state inheritances taxes, or at least to a higher rate than it would have been for a named beneficiary. Moreover, creditors will also get full access to the life insurance proceeds. Instead, name the specific person you want to receive the proceeds as the beneficiary.
Mistake 2: Not naming at least two “backup” beneficiaries.
If you have just one beneficiary named and that person dies before you do, the proceeds from the insurance policy will be paid to your estate. This of course, will bring all the problems pointed out in Mistake 1 above. So, name at least two backups for every person named as a beneficiary in your life insurance policy.
Mistake 3: Not checking your policy at least every 3 years.
A lot of times a policy is made payable to a former spouse or some other person whom the insured person doesn’t want to receive the proceeds. Other times, children who are born after the policy was purchased remain omitted although the insured would have wanted them to receive the proceeds. To counter such slip ups, it’s a good idea to check your policy at least once every three years to make sure the relevant people are getting (or not getting) a part of the proceeds.
Mistake 4: Getting the wrong type of life insurance.
You need to match the right product with the right problem. For instance, if you have a short-term product, it has a higher chance of running out when you might need it the most. So check with a good insurance agent and see which is the right type of life insurance for your needs.
Mistake 5: The personal coverage is insufficient for your family’s financial security needs.
Ask yourself who will pay for your family’s living expenses or your kids’ education after ten years? What kind of money will be needed if you happen to pass away? Your family might have to face a lot of financial difficulty if your policy’s coverage is inadequate for their financial needs. So get a clear insurance analysis of what you have right now and what your family will probably need in the tragic case that you pass away or become severely disabled.
Mistake 6: Making your policy payable outright to your minor children/grandchildren.
Minors are at a legal disability. An insurance company will not willfully pay out large proceeds outright to minor children. The court will appoint a custodian or guardian, at your children’s expense, to dispense the money to them. The best option is to set up a trust for the minor beneficiaries, and name the trust as the recipient of the proceeds from your insurance policy. This is the best way to secure the financial future of those who can’t handle large sums of money, usually minors.
If you are careful to avoid the above life insurance mistakes, your life insurance will give you the peace of mind you deserve, and the financial benefit your family deserves in case something happens to you.