As life insurance lawyers, we recognize that many families use life insurance policies as the keystone of their financial planning. A beneficiary should receive the proceeds very soon after a life insurance policyholder dies. Many other death benefits may require months—sometimes even years—while the estate passes through the probate process. The swift settlement process make life insurance extremely useful in estate planning, even for families with modest, middle-class incomes.
That’s why a life insurance settlement delay can become a minor catastrophe: it may leave a family penniless when the breadwinner passes on, or cause wrenching financial hardship at a critically desperate time.
Here at Life Insurance Law, our network of skilled attorneys work hard to help clients fight cases of delayed or denied life insurance claims. Helping families this way is an essential part of our jobs. But sometimes we are stymied when a policyholder has made serious mistakes in handling his insurance accounts. Because life insurance errors can be so damaging to a family’s financial health, you might want to share this article with your friends and make sure they are protecting their household’s best interests when it comes to life insurance coverage.
Don’t make these eight critical life insurance mistakes
Life insurance agents are in the business of selling policies. Sure, they are interested in you and your financial plans, but they more interested in closing the sale. They are salesmen, not financial planners. You cannot depend on them to catch every strategic mistake you might make when you sign up for life insurance coverage.
You may already have an accountant, a financial advisor, a tax and estate planner, or a life insurance attorney. That’s great! Rely on their advice. But bear in mind that, ultimately, you are the one responsible for your financial decisions. You need to be alert to the most common life insurance pitfalls.
- Mistake #1: Buy life insurance—and keep it a secret. Nobody will be able to file a life insurance claim if they don’t know you bought a policy, or can’t find the document among your papers. Under prodding from state governments, life insurance companies have become more aggressive in tracking down forgotten beneficiaries, but the most effective way to ensure your family gets the money they deserve is to make sure they know you’ve planned for their future.
- Mistake #2: Don’t pay your premiums. If you stop paying your premiums, your policy will lapse and your beneficiaries will get nothing. If you’ve missed a payment by only a few days, you may still be okay: most life insurance companies grant a “grace period” for premium payments, typically 30 days. If it’s been longer than that, call your insurance agent immediately. You still may be able to get your policy reinstated.
- Mistake #3: Lie on your life insurance application. Some applicants try fibbing about their health, smoking habits, drug use, history of depression, and other details to try to get a better price for their life insurance. Insurance companies call this material misrepresentation, and they can refuse to provide you coverage or even cancel your existing policy (and keep your premiums). In extreme cases, you could also be prosecuted for fraud.
- Mistake #4: Name your estate as your beneficiary. This is a great way to deplete the value of your life insurance. If your estate gets the proceeds of your insurance policy, the benefits may be eaten up by probate costs, creditors’ claims against the estate, inheritance taxes, and other fees. Remember, one of the main reasons to use life insurance as a financial planning tool is to avoid probate court, so always name a living person rather than your estate as the beneficiary.
- Mistake #5: Don’t assign secondary or contingent beneficiaries. If your beneficiary dies before you, then your death benefits will go to your estate. We just discussed why that’s bad. You can avoid this by designating one or more substitute beneficiaries—sometimes called secondary or contingent beneficiaries—who will receive the benefits instead.
- Mistake #6: Choose a beneficiary who relies on government benefits. You may have great intentions in choosing your impoverished relative to receive your death benefits, but your generous impulse may cause serious problems. The one-time windfall from life insurance can disqualify some recipients from government benefits programs they rely on. If you have a relative who is living in need, there may be other estate planning means—such as naming him in your will or establishing a trust—to help him after your death.
- Mistake #7: Name a minor to be your beneficiary. If you name your child or grandchild as the primary life insurance beneficiary, major complications arise if the young person is still below legal age when you die. In most jurisdictions, the courts will intervene and appoint a guardian for the minor’s interests and require periodic reports on how the money is being managed. Legal fees can eat up a significant amount of the money before the minor turns 18.
- Mistake #8: Borrow too much from your policy. In many cases you can borrow money, tax-free, against the cash value of your life insurance policy. It’s vital that you plan carefully if you take advantage of this option. Borrowing too much can make your policy lapse; if you die with debts outstanding to the insurance policy, your beneficiary may not get the money he expects; and failure to manage your borrowing can expose you to additional taxes.
Many of the worst mistakes people make with life insurance can be corrected early on. If you wait until the claim is filed, it may be too late.
Consult a financial planner to make sure that your family will be able to carry on after you have gone. Similarly, you can turn to the experienced professionals at Life Insurance Law when you face unexpected complications with a life insurance application or benefits claim. Contact our network of life insurance benefit attorneys by calling (215) 531-7961 today to get your questions answered. And remember our promise: we never charge you a legal fee unless we can get you a financial recovery.
