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EIGHT COMMON LIFE INSURANCE MISTAKESPosted by Roth-IRA-401k on: 2006-01-25 09:46:28 in category:
Retirement Planning News [ Print | Permalink / 0 Comment(s) ] EIGHT COMMON LIFE INSURANCE MISTAKES Question: What’s more painful? A root canal or buying life insurance? If you hesitated when answering, you’re with the majority of us. Life insurance I believe is one of those necessary evils we most endure, and is a fundamental component of most financial plans. Yet consumers frequently make mistakes either when buying life insurance or while keeping it in force. Once you’ve crafted a financial or investment plan, it makes good sense to protect it. Life insurance can be purchased to replace income, payoff debts or taxes and even educate children. An unexpected death can throw a monkey wrench into even the best laid plans. Here are some of the more common mistakes to try to avoid. 1. Letting premiums define your decision. People often start from the premise that they can afford to pay only a certain amount on insurance premiums, and that determines the amount of life insurance they buy. Instead, you should first determine how much insurance coverage you need. This usually is based on such factors as current income, future income needs, return from the invested death benefits and so on. Once you’ve determined the proper amount of coverage, you then can decide which type of insurance to buy. For example, you may only be able to afford term insurance for that amount of coverage, or a cash-value policy such as universal life may be appropriate. 2. Thinking of life insurance as an investment. Certain types of life insurance do build up money very nicely over time, which can be used to supplement retirement or college expenses. The tax deferred growth inside insurance accounts and their tax-free income streams are a unque and appealing feature. But one should buy insurance first for it’s insurance value and second for it’s investment returns. 3. Automatically buying term. Term life insurance, in which you pay only for the death benefit, is an appropriate type of insurance for many people. However, other types of policies, such as universal life or variable life or second-to-die policies, may be a better choice in many situations. It’s important to choose the insurance that’s right for you, not pick something just because you’ve heard it’s what everyone should buy. 4. Confusing illustrations with facts. Life insurance illustrations typically are charts or tables designed to show the policyholder how much a cash-value policy will be worth over time. For example, the illustration might show the consumer making ten annual premium payments for a policy, at which point the policy’s cash dividends would be sufficient to pay future premiums. That is, the premiums would “vanish.” However, illustrations are only projections of what may or may not happen in the future. They are not guarantees. The company’s interest rates may decline and earnings may not be sufficient to cover the premium in the future, necessitating additional out-of-pocket payments. One should keep track of the cash-value over time to defermine if it’s growth is on target to pay future premiums. 5. Failure to monitor your insurance. At least every year or two reexamine your policies to be sure they are still doing the needed job. For example, your circumstances may have changed (marriage, divorce or birth, for example) and the amount of insurance may no longer be adequate or it is no longer the correct type of insurance policy. Be sure the carrier is still highly rated. Ask your insurance company for a current in-force illustration to compare with the original illustration. Are interest rates or investment returns from selected stock mutual funds still producing the intended returns? 6. Forgetting to change beneficiaries. Divorce, death, birth or other life circumstances may dictate a need to change beneficiaries. Yet it’s easy to overlook. Imagine seeing the death benefits from a policy on your recently deceased spouse go to that person’s former spouse instead of you. Worse, imagine if you had to pay the estate taxes on those benefits. It has happened. 7. Needlessly replacing a policy. Sometimes it is appropriate to drop a cash-value life insurance policy and replace it with another policy, especially if your life circumstances have changed. But be careful about dropping a policy just to get a “better-performing” policy. Most of the first-year premium on the new policy can go to fees and policy expenses. 8. Having the wrong ownership. Insurance benefits are free of income tax to beneficiaries, but they can still face estate taxes if the insured owns the policy—a very common situation. When the insured dies, the policy benefits become part of the insured’s estate and thus subject to estate taxes. To avoid this, have someone else own the policy or put it into an irrevocable life insurance trust. Insurance is a financial tool. It should be used to financially protect us from the many pitfalls life (and death) can toss at us. Insurance can’t make bad things stop happening, but it can eliminate the financial burdons that accompany life’s setbacks. Andy Barkate CRPS, CSA is the President of California Financial Network, a local Investment and Retirement Planning firm, with offices in Bakersfield, Lancaster and Ridgecrest.. Your questions and comments are welcome at 760-371-2115, 800-914-6837 or e-mail abarkate@calfinancial.com. Question: What’s more painful? A root canal or buying life insurance? If you hesitated when answering, you’re with the majority of us. Life insurance I believe is one of those necessary evils we most endure, and is a fundamental component of most financial plans. Yet consumers frequently make mistakes either when buying life insurance or while keeping it in force. Once you’ve crafted a financial or investment plan, it makes good sense to protect it. Life insurance can be purchased to replace income, payoff debts or taxes and even educate children. An unexpected death can throw a monkey wrench into even the best laid plans. Here are some of the more common mistakes to try to avoid. 1. Letting premiums define your decision. People often start from the premise that they can afford to pay only a certain amount on insurance premiums, and that determines the amount of life insurance they buy. Instead, you should first determine how much insurance coverage you need. This usually is based on such factors as current income, future income needs, return from the invested death benefits and so on. Once you’ve determined the proper amount of coverage, you then can decide which type of insurance to buy. For example, you may only be able to afford term insurance for that amount of coverage, or a cash-value policy such as universal life may be appropriate. 2. Thinking of life insurance as an investment. Certain types of life insurance do build up money very nicely over time, which can be used to supplement retirement or college expenses. The tax deferred growth inside insurance accounts and their tax-free income streams are a unque and appealing feature. But one should buy insurance first for it’s insurance value and second for it’s investment returns. 3. Automatically buying term. Term life insurance, in which you pay only for the death benefit, is an appropriate type of insurance for many people. However, other types of policies, such as universal life or variable life or second-to-die policies, may be a better choice in many situations. It’s important to choose the insurance that’s right for you, not pick something just because you’ve heard it’s what everyone should buy. 4. Confusing illustrations with facts. Life insurance illustrations typically are charts or tables designed to show the policyholder how much a cash-value policy will be worth over time. For example, the illustration might show the consumer making ten annual premium payments for a policy, at which point the policy’s cash dividends would be sufficient to pay future premiums. That is, the premiums would “vanish.” However, illustrations are only projections of what may or may not happen in the future. They are not guarantees. The company’s interest rates may decline and earnings may not be sufficient to cover the premium in the future, necessitating additional out-of-pocket payments. One should keep track of the cash-value over time to defermine if it’s growth is on target to pay future premiums. 5. Failure to monitor your insurance. At least every year or two reexamine your policies to be sure they are still doing the needed job. For example, your circumstances may have changed (marriage, divorce or birth, for example) and the amount of insurance may no longer be adequate or it is no longer the correct type of insurance policy. Be sure the carrier is still highly rated. Ask your insurance company for a current in-force illustration to compare with the original illustration. Are interest rates or investment returns from selected stock mutual funds still producing the intended returns? 6. Forgetting to change beneficiaries. Divorce, death, birth or other life circumstances may dictate a need to change beneficiaries. Yet it’s easy to overlook. Imagine seeing the death benefits from a policy on your recently deceased spouse go to that person’s former spouse instead of you. Worse, imagine if you had to pay the estate taxes on those benefits. It has happened. 7. Needlessly replacing a policy. Sometimes it is appropriate to drop a cash-value life insurance policy and replace it with another policy, especially if your life circumstances have changed. But be careful about dropping a policy just to get a “better-performing” policy. Most of the first-year premium on the new policy can go to fees and policy expenses. 8. Having the wrong ownership. Insurance benefits are free of income tax to beneficiaries, but they can still face estate taxes if the insured owns the policy—a very common situation. When the insured dies, the policy benefits become part of the insured’s estate and thus subject to estate taxes. To avoid this, have someone else own the policy or put it into an irrevocable life insurance trust. Insurance is a financial tool. It should be used to financially protect us from the many pitfalls life (and death) can toss at us. Insurance can’t make bad things stop happening, but it can eliminate the financial burdons that accompany life’s setbacks. Andy Barkate CRPS, CSA is the President of California Financial Network, a local Investment and Retirement Planning firm, with offices in Bakersfield, Lancaster and Ridgecrest.. Your questions and comments are welcome at 760-371-2115, 800-914-6837 or e-mail abarkate@calfinancial.com. |
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