How To Really Screw Up Your Life (Insurance)

by Ron Haynes

family People buy life insurance for a variety of reasons: getting married, having children, buying a home, or estate protection. But no matter what your personal reasons for insuring your life, what you’re really insuring is your family’s ability to continue on without your income. You’re also insuring that your family isn’t saddled with your final bills, debts, estate taxes, and other obligations.

Having witnessed first hand the devastating effects of a breadwinner dying without life insurance, I’ve made abundantly certain that MY family won’t be put through that horror. Along the way, I’ve thought about some of the mistakes people make when it comes to insuring their family’s ability to continue on without them.

Maybe making these mistakes won’t actually screw up YOUR life, but the lives of those you leave behind:

  • Waiting too long to get life insurance
  • Buying too little life insurance
  • Mistrust of life insurance companies
  • Naming your estate as a beneficiary
  • Buying the cheapest term life insurance
  • Buying the wrong term life insurance policy
  • Skipping or forgetting to make your payments
  • Borrowing too much from a whole life or universal life insurance policy

Waiting to get life insurance

Yes, that’s the number one mistake people make when it comes to life insuranceprocrastination. The moment you feel the need, it’s best to get a life insurance quote and begin making preparations in your budget. The longer you wait, the higher your premium costs will go because rates are based on age.

Buying too little life insurance

Most experts agree that breadwinners need to have at least 15 times their annual salary in life insurance. That’s what I carry on myself, though I’m thinking about adding to it. But even if you don’t have a family, it still makes good sense to have a little life insurance, probably through your employer. Why? If you were to die suddenly (it’s always sudden, isn’t it?), you’ll leave behind someone who will have to settle your estate, no matter how small it is. There will be debts to settle, medical bills and deductibles (potentially), as well as funeral expenses. A small life insurance policy through your employer will cover all those and more. It’s the responsible thing to do.

Mistrust of life insurance companies

I’ve actually heard people say that life insurance companies are betting that you’ll live, while you’re betting that you won’t. People don’t like the idea of getting life insurance quotes or dealing with life insurance companies. It reminds them that their life IS short and they already know who wins the bet … the problem is that when they win that bet, they don’t get to experience the payoff!

Naming your estate as the beneficiary rather than naming a person

Making this mistake automatically ties up everything in probate and makes any benefits subject to inheritance taxes. Essentially, you’re naming Uncle Sam as your beneficiary. Go ahead and name someone, preferably a responsible family member, and also name a secondary and tertiary beneficiary as well.

Buying the cheapest term life insurance policy

The life insurance company backing up that policy may not be the strongest from a financial sense. Don’t just buy cheap term life insurance, do some research. You don’t want to make payments for 28 years only to die and leave your family to find out that the life insurance company was insolvent. Always seek out respectable life insurance companies such as New York Life which is a mutual life insurance company, not a public life insurance company. Mutual companies are not owned by shareholders, but by the policy holders. It DOES make a difference in how they view you as a customer.

Buying the wrong term life insurance policy

Not all term life insurance policies are created equal. If you’ve decided to buy term life insurance, look for a term policy that’s “convertible.” That means that when the term runs out, you have the option to convert over to a whole life policy without evidence of insurability. Why is this important?

Say you buy a 20 year level term life insurance policy when you’re 30. Later, at age 43, you are diagnosed with a disease, which one doesn’t matter. Treatability doesn’t matter either. When you’re term life insurance policy runs out just 7 years later, you’ll have to re-apply and be judged on your “insurability.” Since you now are labeled with that disease, your rates will be HUGE if you can get life insurance at all. You may discover that you are uninsurable. Having a convertible term life insurance policy will insure (pardon the pun) that you can get the life insurance coverage you need for your family.

Forgetting to make the payment

Today, this isn’t the problem that it used to be. Formerly, payments to life insurance companies were made on an annual or semi-annual basis, but today, most companies draft your checking account on a monthly basis. It’s up to you to make certain the money is in the bank, though. Miss a payment and you might find your policy is lapsed.

Borrowing too much from your life insurance policy

Believe it or not, all the financial pundits *SURPRISE* aren’t necessarily correct when they say to ONLY buy term life insurance (sorry Dave Ramsey). Certain permanent life insurance policies are a perfect fit for some personal financial situations, but I’m not going to get into the whole term vs whole life insurance thing. If you decide to purchase a whole life insurance policy or a universal life insurance policy based on your personal financial circumstances, you will eventually have the option of borrowing from its cash value. But you must manage these withdrawals carefully. Take out too much causing your policy to lapse or run out of money as a result, and all those gains you’ve taken out become taxable.

If you do withdraw too much money and your life insurance policy is about to lapse, you may be able to maintain it by making additional premium payments. When tapping your life insurance policy’s cash value, be sure to monitor it closely and consult with your tax advisor to avoid any unwanted tax liability.

Note:

This article was included in the Carnival of Personal Finance at Taking Charge. Thanks!

Photo by ale2000

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 10 comments }

Evan

GREAT ARTICLE it really highlights some benefits of whole life and some pitfalls that people don’t understand when buying insurance (even if it is just term).

You are wrong on a certain aspect though,
“Making this mistake automatically ties up everything in probate and makes any benefits subject to inheritance taxes. Essentially, you’re naming Uncle Sam as your beneficiary. Go ahead and name someone, preferably a responsible family member, and also name a secondary and tertiary beneficiary as well.”

Regardless of whether you name your estate beneficiary or not, life insurance is includable in your taxable estate under IRC 2042, and only a handful of states have inheritance tax (which is different than estate taxes).

Ron

Hmm … that actually depends on who owns the policy, right? You can leave up to $3.5 million (as of 2009) to your heirs without having to pay estate taxes, but anything in excess of that is subject to them.

If someone leaves more than $3.5 million, they need to have an irrevocable life insurance trust to own the policies. However, if you transfer an existing policy into a life insurance trust, it is still considered part of your estate until three years have passed, so don’t die until three years have passed!

Anyone with less than a $3.5 million dollar estate simply needs to set up their beneficiary as the actual owner of the policy and they should be set.

Evan

For the most part you got it! As you could guess it gets a little bit more complicated than that

Ron

Haha, yeah it does!
hint: work with an estate attorney … you won’t regret it.

Daddy Paul

“Buying the wrong term life insurance policy”
Most people just as I did woke up one day and said “I’m going to be a dad I need to buy life insurance” . I ended up with some whole life hybrid that was a drain on my wallet for 18 years when I finally cashed it in.

Shaun McGowan

Life insurance rates shouldn’t be the only consideration when it comes to decision making. Don’t let premiums define the decision.

Ron

Excellent point. That’s why we should look for a life insurance company with strong financials and good ratings.

Denise

What you have elaborated here couldn’t be truer. Life insurance is hugely underestimated by the average American. It is so important to get the right term policy, like you said. Besides the convertibility option, policy holders can also consider the renewability option. This allows them to renew a term life policy for the same term, and for the same or marginally higher premiums, without having to prove insurability.
Buying a term life policy with a reputed online insurance agency is easy and safe. Since online agencies have hundreds of life insurance carriers on their database, they are able to pick out the best policies that suit our requirements, not necessarily the cheapest. Reputed online agencies (look for one with a Better Business Bureau accreditation) also make the sure that you are handed comparison charts for the quotes they give you. They also provide you with financial information on the insurance company, and provide you with their rating as well – look for a rating of A or higher,

Denise at AccuQuote
Disclaimer: I work for AccuQuote and this is my personal opinion.

AKIF

life insurance is very important thing every one should have at least one life insurance policy. Life insurance is financial coverage of someone’s life. When someone dies, their life insurance will provide the appropriate funds to the family left behind. Life insurance is protection against the death of an individual in the form of payment to a beneficiary – usually a family member or business. In exchange for premium payments, in the event of the death of the insured person, the face value. Essentially, a life insurance policy is a contract between the named insured and the insurance company.

-AKIF

Joseph

Don’t make any rash decisions when you’re first looking for options with regards to buying life insurance. Just because it’s the cheapest doesn’t always mean it’s the best. Term policies are very popular but in most cases you need to go through a health screening and plenty of questions to qualify. You’re existing employer might offer a group coverage so be sure to inquire there as well.

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