Haunting Life Insurance Mistakes

With Halloween right around the corner, parents and grandparents are usually focused on costumes and candy rather than life insurance policies. 

Life insurance can serve multiple purposes, and for most people is a tool for income replacement.  Often a term-life policy, which provides a preset death benefit when the insured person dies, is all that is needed.  Unfortunately, this is not enough to completely forget about the policy.  Below are some of the costly life insurance pitfalls that haunt many of us:

• Rate Increases. With a level premium, term-life policy, you are guaranteed that the cost of the plan will not go up during the initial coverage period.  After that, be aware.  When the policy is up, you could get an invoice for the latest premium that is many multiples of what you had previously been paying. 
• Affinity Groups. Some professional associations provide life insurance to their members at group rates. However, the price is not necessarily less than the open market.  There are also hidden costs that could surprise you too.
• Beneficiary Designations. It is vital you keep beneficiary designation forms up-to-date.  For example, make sure to file an amended form if you get married or divorced or if your spouse dies. 
• Estate Tax. If you are the insured and the policy owner, the proceeds will be considered part of your taxable estate.  Hence, those funds are added to everything else you leave behind.  If the total is more than the tax-free amount and you leave it to anyone except your spouse or charity, it will be subject to estate tax.  You can avoid estate tax on life insurance proceeds is to designate a family member who will receive the proceeds of the policy the owner. 

See Deborah L. Jacobs, Five Life Insurance Mistakes That Can Haunt You, Forbes, Oct. 20, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.