Life insurance is like a lot of things — neglect it, and it may fail you when you need it most.
Sometimes, the worst choice we can make is to not make a choice. Someone reminds us that we ought to do something. We agree: “Why yes, I ought to do that.”
But we don’t get around to it.
And sometimes, like in the story below, our non-choice makes a choice for us.
Patty, Paul and life insurance in a drawer.
Patty and Paul were new “empty-nesters.”
Their son had a new job and had finally quit moving back home. Their daughter had finally graduated from college. The kids were truly on their own and doing well for themselves.
Paul suggested downsizing their home. Maybe buy a motorhome too. Patty thought that sounded great.
Patty also suggested they review their life insurance to make sure it fit their new empty-nester situation.
She thought that now might be a good time to pull out the life insurance policies from the drawer and talk to an agent about their new dreams and goals.
Paul said, “Why yes, we ought to do that.”
Time passed. Patty and Paul retired.
Paul’s ideas worked out. They moved to a smaller home. It was a beautiful new townhome. And of course, they bought a motorhome and toured the country.
But they never quite got around to Patty’s idea of reviewing their life insurance.
More time passed. New joys arrived.
Grand-kids. Wow! Patty and Paul fell in love with the little rascals.
Everything looked new through the eyes of these precious grandchildren. Oh, what they wouldn’t give to make sure these little ones had every opportunity in life.
And then Patty and Paul remembered their life insurance. They could increase the face amount and leave a legacy for these precious little grandchildren when the time came.
Things changed, and dreams died in a drawer.
But Paul and Patty’s health had changed. Paul now had a heart condition, and Patty had recently survived a cancer scare.
They dug the life insurance policies out from the drawer and realized that the policies were due to expire soon.
They were near the end of their 30-year term. The policies were renewable at affordable rates only if they were in good health. But now, they weren’t insurable.
If only Paul and Patty had not neglected their polices. Now, their dreams had died in a drawer.
Dreams matter. Life changes.
As I finish this four-part series on common life insurance mistakes, I want to personally appeal to you.
I’ve been an agent for over 20 years. I’ve seen dreams that are met by life insurance, and I’ve also seen dreams not fulfilled because of poor life insurance planning.
Please... pull out those old policies hiding in your drawer. Blow off the dust and call an experienced agent to talk about your goals and dreams.
Let an experienced life insurance professional help. Do it today.
You can make a lot of mistakes with life insurance. But none is worse than bungling the beneficiary.
Without expert help, you could create a financial disaster after you die. I’m not an attorney, and this is not legal advice. But it’s a starting place for discussion with trusted professionals.
Here are five “beneficiary bungles” that come to mind:
1. Not specifying the exact beneficiary.
If you name “my family” or “my kids” as the beneficiary, you are risking chaos after you die. Families change. People change. If you name a person or persons as the beneficiary, always use complete names, dates of birth, and other identifying information.
2. Not having back-up beneficiaries.
If your beneficiary is a person, and you and they are both killed in the same accident, the death benefit will go to your estate. And you really don’t want that. (See number 3.) So always have two contingent (back-up) beneficiaries.
3. Naming your estate as the beneficiary.
Estates are subject to federal inheritance taxes.
But that’s not all. Estates are also subject to claims from creditors and others.
And estates often get tangled up in probate court for years before anyone sees any money. Never name “my estate” as the beneficiary.
4. Naming a minor child as the beneficiary.
Don’t do this.
California, like most states, will not allow a minor child to directly receive life insurance proceeds. Instead, a court will appoint a trustee to handle the money for them.
You don’t want that. This is where a well-written trust can be the best option. In a trust, you can explain exactly how the money should be used for the kids.
If you don’t want to set up a trust, at least designate the custodian of the money, using the Uniform Transfers to Minors Act (UTMA). It’s relatively simple to do.
5. Creating the “unholy trinity” tax trap.
Technically, this is known as the Goodman Trap or the Goodman Triangle named after a famous 1946 court case.
When the policy owner, the insured person, and the beneficiary are three different people, the IRS will look at the death benefit as a gift and tax it. Here’s how that works:
Sarah has a disabled child with ongoing medical bills. So, she buys a life insurance policy on her husband, Bill, and then names her son, Alec, the beneficiary.
It makes perfect sense, right? If Bill dies, she will have a harder time taking care of Alec’s medical bills. And she wants to make sure that the money is understood to be for Alec, not anyone else.
Bill died one day. The death benefit was paid to Alec, and the court appointed Sarah the trustee of the money.
Weeks later, the IRS sent her a notice. She owed a gift tax on the money that Alec received. The IRS viewed the money as a gift that she (the owner) gave to her son (the beneficiary). It was taxable.
Don’t do this alone.
First, consult with an experienced life insurance agent before naming a beneficiary.
Second, consult with an attorney who specializes in the areas of estate planning, probate, and trusts.
Life insurance planning is safest when done as a team activity. If you haven’t reviewed your life insurance policies in a while... give a trusted professional a call today.