Four Common Life Insurance Mistakes
People all too often purchase life insurance and make one of the following common mistakes. These common mistakes could have been easily avoided or corrected with guidance. Instead these mistakes lead to serious consequences in terms of expense and aggravation. Here are some common life insurance mistakes:
- Naming A Minor Child or Grandchild as Beneficiary. The most detrimental mistake a parent or grandparent can make is to name a minor (i.e. an individual under the age of 18) as beneficiary of a life insurance policy. The money will be held in a custodianship account until the child becomes of legal age (i.e. 18 years of age). What is worse is that the beneficiary will receive the funds at 18, outright, to do with what he or she pleases. It is clearly imprudent to pay a lump sum, no matter how great or small, to a child, even if the child is legally an adult in the same manner that it would be imprudent to pay a lump sum to an emotionally immature individual with no financial experience. SOLUTION: There are simple estate planning tools that can be utilized to ensure a much safer and surer way of providing financial security.
- Not Naming a “Back-Up” Beneficiary. This problem usually occurs when a named beneficiary dies before the insured, although there are individuals who simply fail to name a contingent beneficiary for the life insurance, for whatever the reason. SOLUTION: Not only should you designate a beneficiary of your life insurance, but you should designate a contingent beneficiary in case your first choice is no longer living at the time of your death.
- Failing to Check Your Policy Every 3 Years. Just as with any other important asset, it is good practice to revisit your life insurance policy and make sure what you wanted 3 years ago is what you want today. An alarming number of policies are payable to beneficiaries that an insured no longer would want to receive the proceeds, like an exposure. Your life insurance policies should keep up with major life events. SOLUTION: Every 3 years you should contact your insurance carrier to confirm (in writing) that your policy is (1) active and (2) who the current beneficiaries are.
- Beneficiary Language is Wrong or Unclear. People make mistakes. Life insurance companies are no exception. All too often, beneficiary language can be wrong or ambiguous on a life insurance policy creating problems in the future. SOLUTION: Contact your insurance carrier and have them confirm this information to you (in writing).