Life insurance is an important protective tool.
You have a family.
They depend on you to provide for them.
Life insurance will help you provide for them, even if you die.
According to a recent WTOP article titled “4 questions to ask to maximize your life insurance benefits,” you should act strategically to maximize your life insurance.
How do you act strategically?
Analyze your circumstances.
The amount of insurance and type of policy you need is dependent on your family situation.
You want to set up your loved ones for financial success in the future, yes?
Do you have a mortgage?
Do you have children depending on you for college tuition?
Does your spouse need money for retirement?
You should get a policy large enough to cover your goals.
If you divorce and receive support from your ex-spouse, ask for the settlement to include a requirement to maintain a life insurance policy with you as a beneficiary.
Otherwise, the support will stop at the death of your ex-spouse.
If you move from full-time employment to serving as a stay-at-home parent or caregiver, you should still have a policy.
Why?
The service you provide your family will cost money to replace.
Update beneficiaries.
Be sure to keep your policy from paying out to the wrong individual.
If you have a life change, update your beneficiary designations.
When you do so, be sure to follow a few guidelines.
What are they?
Do not designate your estate as a beneficiary.
This will subject your policy to both probate and creditors.
Yikes!
Instead, you should designate a trust or an individual.
This will allow the policy to pass income tax free and bypass probate.
As you update be sure to understand the difference between “per capita” and “per stirpes” when it comes to the potential of having a predeceasing beneficiary.
For example, say you have two beneficiaries designated receive equal shares of your insurance "per capita" and one dies before you. In that case, the surviving beneficiary would receive the entire amount and nothing would pass to the children of the deceased beneficiary.
On the other hand, assume the same fact pattern, except the equal shares pass "per stirpes" and not "per capita." This approach would pass the one-half share of the deceased beneficiary in equal shares to his children.
When choosing beneficiaries, it is not wise to choose minors.
Why?
They will receive the payment outright when they reach the age of majority.
Most young adults are not ready to handle a significant lump sum of cash responsibly.
Do not designate an adult or child with special needs to receive the benefit directly.
This could disqualify them from their eligibility for government benefits.
A trust could be a wise alternative in either of these situations.
Consider a trust.
You can maintain greater control of the policy payout if you designate a trust as a beneficiary.
Work with an experienced estate planning attorney to ensure your trust and insurance policy work together to meet your desired goals.
Unless an "irrevocable trust" is the owner and the beneficiary of the insurance policy from the very start, the death benefit will be included in your gross estate for tax purposes.
An irrevocable life insurance trust can help remove an already issued policy from your estate – unless a three year look-back rule applies.
In other words, death bed transfers to the trust will not work.
You must have no "incidents of ownership" for more than three years after transferring the policy to the irrevocable trust.
Understand policy exclusions.
Some universal exclusions may prevent your beneficiaries from receiving the death benefit you intended for them.
What are a few common exclusions?
There is usually a "contestability" period with insurance companies.
This means they can cancel coverage or deny a claim for misrepresentations or omissions on your application.
If you die during this period, you loved ones could be denied a death benefit for misrepresentations even if it was not the cause of death.
Another exclusion involves material misrepresentation.
What does this mean?
If you withheld information or committed fraud in your application to obtain coverage for which you would otherwise have been denied, your claims could be denied after the contestability period.
Another common exclusion is the suicide clause.
Almost all life insurance contracts have this.
If the insured commits suicide in the first two years of the policy, most will not pay out.
Some policies have a few specific exclusions in their fine print, including illegal or certain dangerous activities.
For example, because I have an "airman certificate" to fly as a private pilot, one of my policies has an exclusion if I die while flying an aircraft.
Take time to understand and make informed decisions about your life insurance portfolio as you review it with your trusted insurance agent.
This is an essential step toward providing financial security for your loved ones, especially if the "expected" happens sooner than expected.
Reference: WTOP (March 6, 2019) “4 questions to ask to maximize your life insurance benefits”
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