The simple fact is that everyone should have life insurance as part of their estate plan. At the very least, persons should have a minimal life insurance policy to pay for their funeral, burial and other last affairs. It would also be beneficial to leave your heirs something to pay off any debt that you had at the time of your death, and possibly some funds which your heirs can live a better life. Many people already have life insurance. Whether you already have insurance or are contemplating it, the following are ten common mistakes that should be addressed and which can be easily avoided.
1. Naming your estate as beneficiary
If you name your estate as the beneficiary of your life insurance policy, you get a three-for-one problem. The proceeds may be subject to federal estate taxes and state inheritance taxes. In addition, naming your estate will give your creditors needless access to your family’s money. The solution is to change the name of the beneficiaries on all life insurance policies, employer-provided and individually owned, to the people and organizations that you really want to receive the money.
2. Failing to name at least two ‘backup’ beneficiaries
Most people don’t name backups to their primary and contingent beneficiaries. You should name at least two backups for every person named in your life insurance policy as a beneficiary. That way, if you and your spouse should die simultaneously, there would be another beneficiary named.
3. Failing to review your policies regularly
Many people go years without checking the names of their life insurance beneficiaries. What happens if your life insurance policy beneficiary is no longer alive or is now an ex-spouse? You should review your policies at least every two years and confirm in writing that the life insurance policies are in force and who the beneficiaries are. If need be, schedule it in your electronic or paper calendar as a to-do item this time next year.
4. Failing to buy the right type of life insurance
Many times we buy life insurance based on price rather than on the need (college funding, mortgage, lifetime income needs) at the time. Term insurance and permanent insurance can be used differently to address the solution you are seeking. For example, you might purchase term insurance for college funding needs and permanent insurance for a spouse’s or beneficiary’s lifetime income needs.
5. Not having enough insurance
It is important to have enough money flowing to your beneficiaries at the time of your death to pay for such needs as food, clothing, shelter and education costs. Considering the escalating cost of college and costs of goods and services in general, people generally underestimate how much insurance they need. Many experts recommend insurance sufficient to cover five to seven times a person’s annual earnings.
6. Making policies payable outright to minor children or grandchildren
Most state laws will tie up the proceeds of a life insurance policy if a minor is the named beneficiary. For example, in Iowa if a child receives proceeds in excess of $25,000.00, a court-supervised conservatorship must be established. The legal and management fees associated with such a conservatorship will be paid from the assets that the minor beneficiary receives. One solution is to consult an attorney to assist you with setting up a trust in your Last Will and Testament for your spouse and children and name the trust as the recipient of the proceeds.
7. Owning all the insurance
If a person’s estate is large enough to be exposed to federal estate taxes. In this scenario, owning life insurance in your individual name could cause problems. To avoid this issue, you can consult an attorney to assist you with establishing an irrevocable life insurance trust which would purchase/receive and own the life insurance policy, as well as be recipient of the life insurance proceeds.
8. Failing to check if the business can buy insurance
If you are self-employed, you may be able to use business dollars rather than personal after-tax dollars to purchase life insurance. You should consult your attorney or tax advisor if you are interested in this possibility.
9. Forgetting term insurance’s term
By definition, term insurance expires at some point. Additionally, term insurance gets more expensive as a person gets older. For this reason, many experts recommend some combination of term and permanent insurance. As noted above, your insurance needs should be reviewed with a professional advisor frequently.
10. Buying life insurance by simply looking for the cheapest choice
If you simply look for the cheapest life insurance policy online/etc., STOP! You typically do not get any advice when buying over the phone or via internet. Although usually being slightly more expensive, policies issues by a local agent and competent professional will give you the biggest bang for your buck. Your agent can advise you on what is right for you given your specific circumstance. A trust agent is just as important as your attorney and tax adviser.
An attorney can assist you with estate planning, including the purchase of life insurance to supplement your estate plan. For more information on estate planning and life insurance, please contact David A. Grooters at Pappajohn, Shriver, Eide & Nielsen P.C., 103 East State Street, Suite 800, Mason City, Iowa 641-423-4264 or visit www.IowaAdoptionAttorney.com|
