Life insurance is used during many aspects of the financial planning process, but it’s easy to overlook several considerations that could cost your family big when the time comes to collect. I’ve rounded up five of the most costly life insurance mistakes that people make.
Mistake 1: The insured’s estate is named as beneficiary (unless intentionally planned due to specific needs)
This will cause the insurance to be taxed as part of the insured’s estate and will tie up much needed money in probate, a lengthy and expensive process.
Mistake 2: Failure to name at least two contingent beneficiaries
In the case of the simultaneous death of both you and your spouse (the most common primary beneficiary), the lack of any contingent beneficiaries would cause the proceeds of life insurance to be included in your estate or the estate of your spouse.
Mistake 3: Failure to regularly review your policies
Circumstances change. What seemed to have been an adequate amount of insurance in the past has now left you vulnerable and inadequately protected.
Many individuals also fail to review the beneficiaries of their life insurance after a big life change, such as a divorce, which could cause an ex-spouse to get the proceeds!
Mistake 4: Insurance is payable to minor children, grandchildren, immature, or handicapped individuals as the beneficiaries.
Much of the time minors do not have the discipline to correctly handle a large sum of money. If you wish to gift a large amount of life insurance to a minor, a life insurance trust may be a better way to go.
Mistake 5: The insurance is owned by the insured
Again this will cause the proceeds from life insurance to be included in the estate of the insured. If the estate is above the exclusion amount of $5 million then all of the insurance proceeds will be taxable. If the insurance is owned by the insured and is transferred to someone else within three years before the insured’s death, it will still be included in the insured’s estate.