Everyone makes mistakes. It’s part of human nature. But when it comes to life insurance, you probably didn’t know better or maybe no one told you. That’s why you depend on advice from your agent or broker. But sometimes you just get bad advice so you need to know how to protect yourself.
Many people make mistakes with their life insurance. Don’t worry, you’re not alone. But after reading this blog post, you will know how to avoid life insurance mistakes you don’t know you’re making.
Mistake # 1: Leaving your life insurance proceeds to Your Will or Estate
One of the nice things about life insurance is the proceeds or money goes directly to someone when you die. You will note I said “someone” which means, a living breathing person. You can virtually name anyone as your beneficiary. Your spouse, your kids, your cat (not recommended) or your aunt Mary in Montana.
The beneficiary page in your life insurance policy is probably the most important page in the whole document. It doesn’t matter what your Will or Estate plan says, the beneficiary page trumps all.
Of course if you muck this up and leave the insurance proceeds to your will or estate, you have doomed your proceeds to go through your will or your estate and subjected the proceeds to state inheritance tax or higher tax rates. Meaning, the money will get tied up in probate or the court system when your intentions were to leave the money to your wife or kids who really need it now that you are gone.
You’ve got some bad advice from a dumb insurance agent or know-it-all attorney who thinks everything needs a legal document. But hey, what do you care, you’re dead. However, your wife or kids have to deal with the mess you left behind.
Lazy Agent, Pushy Attorney Self Defense: Call the insurance company and ask them for a copy of your beneficiary page and make sure the people who you want to receive the insurance proceeds when you die, are named as beneficiaries.
If your ex-wife is still named as beneficiary or your newly born children are not on the document, request a new beneficiary form from the insurance company and update your changes.
Mistake # 2: Leaving Your Insurance Proceeds To Minor Children or Grandchildren
Many insurance agents will advise you to name your spouse as the primary beneficiary and your children as the contingent beneficiaries. So far, so good – unless your children are minors.
Here’s the problem: If you and your spouse die together the insurance proceeds would be scheduled to go to your children. But if they are under age 18 (in most states), the insurance company will not pay the insurance proceeds to your minor children.
Why? Minors are under “legal disability” and most states require that a legal guardian or custodian receives the insurance proceeds for the benefit of your children. Your insurance proceeds could be tied up by the state waiting for a court to decide who the legal guardian of your insurance proceeds should be.
Lazy Agent Self Defense: An easy solution to avoid this mistake is to add a “Trust For Minors” as the contingent beneficiary. It names a trustee or custodian who will be responsible for the financial well-being of your children.
The key term here is Trust. Make sure the person or custodian is trustworthy and will take care of your kids with their best interests at heart. If you think the custodian might buy a Maserati or Porsche with the insurance proceeds because she needs to drive your kids to school, pick someone else.
Mistake # 3: Relying on Group Life Insurance
Big, big mistake that many people make but don’t worry, I got your back. Do not rely on your employer’s life insurance program or company life insurance for your insurance planning.
The average worker in the United States stays at one job for less than 6 years. This means in your working lifetime if you are like most people, you will most likely have worked for 5 or 6 employers.
Relying on your employer to provide you with life insurance is not only a mistake, but it’s just dumb. (Sorry to be blunt here). If your employer has a company life insurance program and offers life insurance as a free company perk, by all means take it. But don’t opt-in for the supplemental life insurance program because it’s…
a) Probably not enough coverage to provide for your family if you die
b) More expensive than buying your own policy if you’re healthy (more on this in a minute)
c) Most likely not portable when you leave your job or get laid off (you can’t take it with you)
d) Becomes outrageously expensive as you get older
Self-Defense: There is one reason for you to rely on life insurance from your employer and that only reason is, you have a serious health issue that precludes you from qualifying for your own life insurance policy. If you are reasonably healthy then buy your own life insurance policy and never, ever rely on life insurance from your employer.
Mistake #4: Believing The life Insurance Quote You Got Online
Go ahead and shop for life insurance online but don’t be fooled by the low prices that you are quoted – They don’t apply to you unless you are super healthy and only eat nuts and cabbage. Statistically, only 10% of the people who apply for life insurance actually get the lowest priced policies.
The premium you ultimately will pay has nothing to do with the initial quote you get online or from any insurance agent. Prices are based on your age, your health and your family history.
Sneaky Agent Self Defense: Keep in mind that life insurance policies are the same no matter who you buy them from, whether it is from an agent or a Website. If someone tells you that you can “cut out the middleman” and get a cheaper policy online, they’re not telling you the truth. The guy or gal behind the website has to be a licensed agent or he or she would not be able to sell you a policy.
Mistake # 5: Buying a Policy, Putting it in the Drawer and Forgetting About It
You should review your life insurance policy about every 2 to 3 years. Most people buy an insurance policy, stick it in the drawer or safety box and forget about it.
Self-Defense: Call your agent or insurance company and ask to have your policy reviewed. Comparison shop online for a new policy (if your health is still good) and see if a new policy might save you money.
Life insurance rates have come down over 60% the last 10 years and the exact same policy you have now, could cost you less. Don’t expect your agent or insurance company to call and tell you you can save money on a new policy. The insurance company will gladly take your money while offering lower rates to new customers.