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Mistake 1 – You fail to review your policies every few years
- Problem: Many policies are term insurance and provide for temporary coverage. It’s easy to forget when the policy term duration is set to expire.
- Solution: Months/years before your term is set to expire it’s best to explore your options. If you are younger and healthy, a new term policy may be what you need. Alternatively you may want purchase permanent life insurance. If you have experienced some health issues since you originally applied it may be best to see if you have a conversion option available to you. This option allows you to extend your life insurance coverage without having to fulfill medical requirements.
Mistake 2 – Beneficiaries not structured properly
- Problem: Beneficiaries may not be structured properly. For example, death benefits may be payable to a minor child and/or children, an ex-spouse, etc. Listing a minor beneficiary can cause delays in having the death benefit paid out; as a guardian or custodian will need to be appointed by the court.
- Solution: Check your beneficiaries. If you do have minor children listed, you may want to establish a Trust and name the Trust as the recipient of your life insurance. This will side step legal restrictions on out right distributions to minors. It’s a much safer and sure way to provide financial security for those who are incapable of managing large sums of money or other assets.
Mistake 3 – Winging it when it comes to deciding how much life insurance to carry.
- Problem: Having an inadequate or excess amount of life insurance to fulfill your families or business financial needs.
- Solution: Complete a life insurance needs analysis. This will help you to address the fundamentals of why life insurance may be needed (debts/obligations, survivor income, childcare, education costs, to secure a business, etc.). There is never an absolute right or wrong answer when it comes to how much life insurance one should have. I have never had a beneficiary state that the deceased had too much life insurance.
Mistake 4: You haven’t matched the product with the problem (purchasing the wrong type of life insurance)
- Problem: Having a short term product (term insurance) that will or may run out when you need it most, you may forfeit one of the most important benefits of buying life insurance: piece of mind. How can life insurance provide the mental comfort intended when it may not work when it is needed the most? Alternatively you may have a Permanent (Whole Life, Universal Life, Variable Life) policy and not fully understand the advantages and/or disadvantages of these products.
- Solution: Evaluate your current coverage to determine if you have the right type of life insurance for your current circumstances and future need. There are many new types of policies that have come to market in the past years.
- Guaranteed fixed universal life insurance: This product provides for permanent life insurance at a minimum cost. Cash value accumulation is not the objective.
- Hybrid life and long term care insurance: Life insurance that allows the owner access to the death benefit (typically 2-3% per month) in the event that the insured needs long term care. For example, a $500,000 death benefit would allow for 3% or $7500 per month until the death benefit has been depleted.
- Institutionally priced life insurance: The primary objective of these policies is to provide tax deferred accumulation similar to a ROTH IRA. The death benefit is often times not the main objective. Policy values are fully liquid and not subject to a sales charge/surrender penalty.
Mistake 5: You buy life insurance as if it is a commodity
- Problem: If you think that all life insurance, even from the same company, is equal; think again.
- Solution: Gain insight and knowledge on how life insurance carriers and products compare. Structured properly, life insurance operates like no other financial vehicle. It can offer peace of mind and comfort, tax favorability (income tax free death benefits and tax advantaged accumulation and distribution) along with financial diversification in that life insurance is not correlated to other financial assets that are subject to market volatility.