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Consumer Reports


Top 10 insurance mistakes and how to correct them before it's too late

http://www.jewishworldreview.com | (KRT) People have the unique ability to learn from their mistakes. Unfortunately, when it comes to life insurance most seniors and retirees never get that chance. Death gets in the way.

Fortunately, however, many of the mistakes seniors and retirees make can be prevented or corrected. Or so says Stephen Leimberg, author of "The Tools and Techniques of Risk Management and Life Insurance."

"The mistakes are those that have occurred over and over - in fact countless times," says Leimberg. "And each mistake has potentially serious consequences in terms of expense and aggravation. Plus, each mistake could have easily been avoided or, if found in time, can be easily corrected quickly and inexpensively."

That said, here are Leimberg's top 10 life-insurance mistakes and their solutions:

1. Naming your estate as beneficiary.

If you name your estate as the beneficiary of your life-insurance policy, you get a three-for-one problem. The proceeds may be subject to federal estate taxes and state inheritance taxes. In addition, naming your estate will give your creditors needless access to your family's money.

"And naming your estate as the beneficiary is guaranteed to increase the workload of your executor," says Leimberg.

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So what's the solution? Leimberg says you should change the name of the beneficiaries on all life insurance policies, employer-provided and individually owned, to the people and organizations that you really want to receive the money.

2. Failing to name at least two ``backup'' beneficiaries.

Most people don't name backups to their primary and contingent beneficiaries. To make sure you have enough backups, Leimberg suggests using what he calls the "Rule of Two."

With the rule of two, you would name at least two backups for every person named in your life-insurance policy as a beneficiary. That way, if you and your spouse, assuming your spouse is your primary beneficiary, should die simultaneously, there would likely be another primary beneficiary.

3. Failing to check your policies at least every three years.

Leimberg says many people go years without checking the names of their life-insurance beneficiaries. And for seniors, this results in many problems, especially when the primary beneficiary is no longer alive or is now an ex-spouse.

"Federal law will generally honor the beneficiary designation," says Leimberg. So, if the primary beneficiary is no longer alive, the money will go to the contingent beneficiaries.

The solution? First ask your life insurance agent to confirm in writing that the life-insurance policies are in force, who the beneficiaries are and that your waiver of premium is still in effect.

Review - with your insurance agent - the beneficiaries, make the appropriate updates and store the document in a place where it won't get lost in the shuffle. Resolve to review the document, if not yearly, at least every three years. If need be, schedule it in your electronic or paper calendar as a to-do item this time next year.

4. Failing to buy the right type of life insurance.

Most preretirees buy life insurance based on price rather than on the need (college funding, mortgage, lifetime income needs) they are trying to insure. And, according to Leimberg, that means people are buying term insurance because of its relatively low cost as one-size-fits-all solution to short- and long-term problems.

Instead, Leimberg suggests that preretirees (and even retirees) use a rifle instead of a shotgun for their life insurance needs. "Match the product with the problem," he says. And in cases where the product is ill-suited for the problem, make adjustments.

Although not fond of generalities, he says people should purchase term insurance for college funding needs, permanent insurance for a spouse's or beneficiary's lifetime income needs and they should evaluate what might be best for a mortgage.

To be sure, permanent insurance comes in many flavors - whole life, universal life and variable universal life. And, in many cases, evaluating the differences between those types of products can be overwhelming.

But Leimberg says consumers should think about those products along a risk continuum. With whole life the insurance company accepts the risk and with variable universal the consumer accepts the risk.

If adjustments are needed, Leimberg cautions against dropping policies or switching policies (using what the industry calls a 1035 exchange) indiscriminately. In some cases, he says it might be wise to purchase a new policy while leaving the old policy in force. At a minimum, he advises people to "Ask questions and demand answers."

5. Not having enough insurance.

Most people don't have enough insurance in force to cover all the needs - food, clothing, shelter and education costs - they may have for however many years they will need the insurance. Leimberg estimates that the cost to raise a child through age 21 (excluding college costs) exceeds $250,000. Add the cost of private college into the mix and the life insurance needed for just one child could easily be $500,000.

The solution? Leimberg suggests that people determine what they have and what their family will need should they die. Experts call this exercise a capital-needs analysis. Regardless of what it's called, do it, says Leimberg.

"You want the money to last long enough for a family to live and you really don't know how long they will need the money" says Leimberg. "It's a guess. But you really don't want to guess wrong."

As a rule of thumb, Leimberg says insurance that covers five to seven times a person's annual earnings is the minimum amount needed.

6. Making policies payable outright to minor children or grandchildren.

In many cases, state laws will tie up the proceeds of a life insurance policy if a minor is the named beneficiary. The state will name a custodian or guardian and the meter will start running.

The solution? Leimberg suggests that a person set up a trust for their spouse and children and name the trust as the recipient of the proceeds. Another option: A person can ask the insurer to pay out the proceeds using a "settlement option." That way the proceeds are doled out to the beneficiaries over a long period of time instead of all at once.

Setting up a trust could cost about $4,000, but that cost may be worth it, says Leimberg. Especially, he says, if there's a chance that the 21-year-old inheriting $100,000 will buy a Lamborghini.

7. Owning all the insurance.

If a person's estate is large enough to be exposed to federal estate taxes, Leimberg says owning life insurance in their name could cause problems. The solution: Leimberg suggests that a person have a trust or an adult beneficiary purchase and own the life-insurance policy, as well as be recipient of the life-insurance proceeds.

8. Failing to check if the business can buy insurance.

Most people, especially those who are now in business for themselves, fail to realize that they can use business dollars rather than personal after-tax dollars to purchase life insurance. Leimberg suggests that business owners consult with a competent professional to evaluate the different types of policies available, including death benefit only, group term carve-outs and split dollar life. "There are all kinds of ways to shift the burden of premiums," says Leimberg.

9. Forgetting term insurance's term.

Many people tend to forget that term insurance runs out at some point, says Leimberg. Or they forget that it becomes more expensive the older a person gets. Or they misjudge the cost of their lifestyle in retirement.

The solution? Leimberg again says people should always ask the question: "What type of policy has the highest probability of accomplishing my objectives? If the policy never accomplishes the objective, it is the most expensive - no matter how low the outlay."

10. Buying life insurance as if it were a commodity.

Most people think of life insurance as a commodity. They shop for a policy online and purchase a policy based on price or other factors. Unfortunately, Leimberg says that thinking can cost a person and their family dearly.

The solution? Find a competent professional. "You wouldn't go to a lawyer who didn't go to law school or a doctor who didn't go to medical school," he says. "The same is true with life insurance. Use someone who has years of experience, rigorous training and credential such as ChFC (Chartered Financial Consultant), CLU (Chartered Life Underwriter) or CFP (Certified Financial Planner). Don't just use your brother-in-law."

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