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Don’t Make These Life Insurance Mistakes

Making a mistake with your life insurance could have severe consequences for the people you’re investing to protect and support. But with careful planning and know-how, you can steer clear of common pitfalls and make sure your loved ones are properly covered. Below are seven common mistakes we see clients make when buying life insurance and selecting beneficiaries and how best to fix them:

1. Naming A Minor (Or Their Guardian) As Beneficiary

You probably didn’t know that you can make mistakes on your life insurance beneficiary designation, did you? One common mistake is naming a minor child as a beneficiary of your life insurance policy. While technically you can do it, it’s never a good idea. Minor children cannot receive insurance benefits until they reach the age of maturity—which can be as old as 21 in some states. If a minor is listed as beneficiary, the proceeds of your insurance will be distributed to a court-appointed custodian, who will manage the funds (often for a not insignificant fee) until the child reaches the age of maturity. At that point, all benefits are distributed to the beneficiary outright and unprotected.

This is true even if the minor has a living parent. A child’s living parent could petition to the court to be appointed custodian. Still, there is no guarantee that a parent would be appointed custodian, especially if the parent cannot qualify or pay for a bond. In many cases, a court could deem a parent unsuitable (if they have poor credit, for example) and instead appoint a paid fiduciary to control the funds.

Instead of naming a minor as a beneficiary, you may think to name the person you have chosen as guardian of your child. But that’s not the right answer either. In that case, all insurance would pay outright to the named guardian and could be used in any way they choose, or even be at risk of being taken in a divorce or by a judgment creditor of the guardian.

The right answer is to set up a trust to receive the insurance proceeds and name a trustee to hold and distribute the funds to a minor child you would want to benefit from your insurance proceeds, when and how you determine, or even hold them protected for your beneficiary to control but safe from divorce and creditors if you choose.

2. Failing To Name A Beneficiary

Whether intentional or not, far too many people fail to name any beneficiary on their life insurance policies or inadvertently name their “estate” as beneficiary. Both errors will mean your insurance proceeds must go through the court process known as probate.

During probate, a judge will determine who gets your insurance death benefits. This process can tie the benefits up in court for months or even years, depending on who the beneficiaries of your estate are under the law. Moreover, probate opens the proceeds to creditors, which can seriously deplete—or even totally wipe out—the funds.

To keep your insurance proceeds out of court , make certain you designate—at the very least— one primary adult beneficiary. In case your primary beneficiary dies before you, you should also name a contingent (alternate) beneficiary. Name more than one contingent beneficiary for maximum protection in case your primary and secondary choices die before you.

3. Relying Solely on Employer-Provided Coverage

While group employer-provided life insurance is a nice employee benefit, people commonly assume that their group life insurance policy through work is adequate. It likely isn’t. For starters, the death benefit—the amount the policy will pay to your beneficiaries—might not be enough to cover your loved ones’ financial needs if something happens to you.

In addition, group life insurance policies also typically aren’t portable, which means you can’t keep your coverage if you leave your job. That’s why it’s important to have your own policy instead of relying solely on supplemental life insurance.

4. Not Understanding What You’re Buying

Understanding the different types of life insurance is not a simple task. A term life insurance policy costs less and remains in effect only for a certain time period, such as 10, 20 or 30 years. In contrast, permanent life insurance, which may be called cash value insurance, can last a lifetime and can build cash value that you can access while living. It is important to meet with a knowledgeable insurance agent before buying a policy. You should never spend money on something you do not understand.

5. Forgetting To Update Beneficiaries

While failing to name any beneficiary is a huge mistake, not keeping your beneficiary designations up to date can be even worse. This is particularly true if you are in a second (or more) marriage and fail to remove an ex-spouse as beneficiary, which can leave your current spouse with nothing when you die.

To avoid this, you should review your beneficiary designations annually as part of an overall review of your estate plan and immediately update your beneficiaries upon life events like divorce, deaths, and births.

6. Buying Too Little Coverage

The more life insurance coverage you buy, the more you’ll pay. That doesn’t mean you should skimp on coverage, though, just to save money. To calculate how much life insurance you need, consider what financial obligations need to be covered, such as replacing your income, paying off a mortgage and other large debts, and paying for your children’s college education. Then consider what assets you have, such as college savings, to cover these costs. The difference between your assets and obligations is the gap that life insurance needs to fill.

7. Not Getting Financial and Legal Advice

Life insurance should be part of a comprehensive financial plan. If you have an accountant or financial planner, you should be discussing how your insurance needs fit into your financial plan before purchasing a policy. If you’re not already working with a financial professional, we have trusted partners we can refer you to for assistance.

Eliminate Future Problems Now

By avoiding these all-too-common pitfalls, you can make sure your life insurance does what it’s supposed to do — provide the protection your family needs. Are you ready to protect your loved ones and legacy? Contact Scarola Law today.

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