The Seven Deadly Sins of Life Insurance
SOURCE: Annuity News & Lifelines ~ September 2006
Have YOU committed one of these seven deadly sins of life insurance?
Using unrealistic assumptions: Life insurance buyers often use an arbitrary number, for instance two or four times annual income, to determine how much coverage they need. This is poor planning, especially if it was done when you were young and earnings were low. You need to determine how much income is needed to support the survivor’s lifestyle. Then ask your financial advisor to examine potential estate tax liquidity issues.
Not reviewing listed beneficiaries: When did you last review your policies’ beneficiaries? How about the contingent beneficiaries? Have you experienced any events, such as divorce, death, marriage, or birth, that could justify revisions? After all, a death benefit going to an ex-spouse might be worse than no life insurance at all.
Letting policies lapse: Do you no longer want your life insurance policies? You can 1035 exchange your policies into a deferred annuity or possibly an immediate annuity to help pay LTCI premiums.
Thinking term insurance satisfies all needs: In certain cases, term insurance can have a place in your risk management plan. However, term insurance may not be the best choice for long-term survivor or estate liquidity needs. After all, 5, 10 or 15 years down the road, this insurance policy expires. At that time, the need will still exist, but your loved ones will be without protection.
Incorrect ownership: Who owns your policies? You should realize that the life insurance policies you own will be included in your estate, no matter who is the beneficiary. Perhaps it wasn’t a concern when you bought the policies, but over the years, a successful career or prudent investing could have pushed you over the exclusion amount. This means up to 46% of a policy’s proceeds could vanish due to federal estate taxes.
Not watching for new products: New products continually come into the market. Plus, some rates have dropped because of increased life expectancies. And don’t forget that a number of policies now offer LTC riders - something that may not have been around when you bought your policies.
Ignoring Mortality: You may not want to admit it, but we are all going to die. Nevertheless, for the most part, life insurance is for the ones whom you will leave behind (although it can be a fantastic place to grow your money tax free for retirement). And by avoiding the seven deadly sins of life insurance, you can have peace of mind in knowing that the maximum amount will pass to those you care about.