• Michael Christensen

How To Avoid Life Insurance Mistakes

The larger the worth of your property be it your estate or business holdings the more chances of increasing the complexities of your Life insurance. While some choose their life policies with ease some get confused with the complexities and tend to make mistakes. Find out more about which mistakes to avoid.

Life Insurance Errors…

Let's say beneficiaries of life insurance proceeds are freed of income tax which in turn could be subject to estate tax.

Fail to change ownership properly: you could exclude life insurance proceeds from your estate and avoid the estate taxes by changing the owner of the policy. So you could be the insured and make your adult child the owner and beneficiary of the policy. Be careful of traps while you transfer ownership of the policy to the trust or your child, and you die within three years of the transfer, the proceeds are included in your estate.

You can avoid that by having the child or trust buy the policy on your life. However, if you're not in good health and the insurance company won't sell you a policy, you're out of luck. No matter which way you transfer ownership, you may have to deal with gift tax issues if you give money to the trust or your child to pay the premiums and they're more than $10,000 per year.

The main thing is to remember to change the ownership and the beneficiary of the insurance policy. An insured person had transferred ownership of a $1 million policy to a life insurance trust but failed to make the trust the beneficiary (he also died within three years of the transfer). The mistake cost the insured's heirs $450,000 in estate taxes that might have gone to them if things had been handled properly.

Misunderstand Beneficiary Implications

Simply having someone else own the policy can still cause problems. A common mistake is to name one other half as the owner of the policy on the life of the other spouse, and then name the child (or life insurance trust) as beneficiary. When the insured person dies and the proceeds pass to the child or trust, the surviving spouse is deemed to have made a gift of the full value of the proceeds, minus the $10,000 annual gift-tax exclusion if no other gifts were made in that year. That's a steep gift tax on a $500,000 or $1 million policy.

Make Improper Exchanges

Increasingly popular are second-to-die life policies. These policies pay upon the death of the surviving spouse, and their premiums are substantially less than separate policies for the same total amount. However, exchanges of a couple's separate life policies for a joint second-to-die policy don't qualify for tax-free exchanges, and any gains that have accrued in the original policies become taxable income.

Make sure the following mistakes are not part of your application: no contingent beneficiary, naming a minor as a direct beneficiary and misstating the date of birth of the insured. Also be sure your insurance agent understands the complexity of ownership and beneficiary rules.

Money Saving Tips For Life Insurance At Various Stages

As financial needs tend to be lower at a younger age, life insurance rates too are substantially cheaper at a younger age. Aim to cover your primary assets to ensure that if something were to happen to you, your beneficiaries will be able to cope financially. If permanent life insurance is what you're considering, compare costs and benefits of whole, universal and variable policies to your own term plan. Some insurance companies may raise prices on the basis of your actual age, but insurance companies generally increase the price of their policies six months before your birthday.

Termed Age Nearest in the industry, the half-year price increase can add up significantly over a 20-year term policy. Here too, the quicker you are in buying the policy, the better. Healthy people carry the least mortality risks proving much cheaper for insurance companies to insure. This results in lower rates for the Super Preferred customer instead of those with higher risk factors like a heart condition, cancer or diabetes. Each one has different needs with no scope for one size fits all possibility, when it comes to term life insurance.

For those in 30s and 40s, it makes sense to go for a 20-year term length, but for somebody approaching retirement a 10-year term may be more suitable. In an example of people trying to quit smoking, purchasing a shorter term may be best for them. Finally, those with 30-year mortgages may find a 30-year term more suitable in ensuring that the house is protected throughout the loan period.

Buy The Right Amount Of Coverage

Insurance companies occasionally offer price breaks for certain coverage amounts. The fact is that many can pay less money for more coverage. Increasing coverage to $250,000, $500,000 or $1,000,000, your prices increase very little. With an agent your time and money can be saved in shopping for life insurance. The recommendation from independent financial planners is for purchases of coverage amounts equivalent to 6-10 times your annual gross income.

Skydiving, deep-sea diving and other high-risk activities can make your premiums more expensive. Insurance companies have their own perceptions of risk factors with some being more liberal than others in certain aspects.

Work policies don't always make the best deal as the policies are usually based on composite profile of the employees you work with, many of whom could be less healthy than you or subject to other underwriting factors driving rates up. Policies of this type expire if and when you leave the company. Life insurance companies often offer discounts to customers paying premiums annually or monthly by electronic funds transfer.

Reviewed Your Insurance Policy…

A review of your life insurance policy should be done at least every three years, if not more often. Rates may lower and your circumstances change, requiring more or less protection. If replacing a policy, give enough time for your new policy to be in place to prevent overlap or lapse of coverage. Term life insurance is the most affordable and cost-effective pure protection available and typically a lot less expensive than a comparable whole life policy. Term can be converted to permanent but not permanent to term

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