Several recent court decisions highlight the consequences of mistakes most people make when purchasing life insurance. The errors generally have two things in common. First, each has potentially serious consequences in terms of expense and aggravation. Second, each can be avoided or, if found in time, corrected quickly and inexpensively. Here they are:

MISTAKE 1: THE INSURED’S ESTATE HAS BEEN NAMED BENEFICIARY

First, many people name the estate of the insured. This could delay the receipt of the money to the family, because the proceeds must go through probate. Not only is probate costly and time consuming, but also makes it public record. Privacy becomes lost. Perhaps most importantly, in most jurisdictions the life insurance money becomes subject to the claims of creditors of the decedent’s estate, a situation that does not exist where there is a named beneficiary.

MISTAKE 2: THE POLICY HAS NO NAMED CONTINGENT BENEFICIARIES

If no contingent beneficiary is named, and if the primary beneficiary has predeceased the insured, in most cases the insured’s estate will be the default beneficiary. That leads to all the drawbacks described in mistake 1.

MISTAKE 3: CHILDREN HAVE BEEN NAMED BENEFICIARIES

In the event both parents die unexpectedly while the children are still young, the minor beneficiaries will not be old enough to exercise legal control over the money. In most cases a court-supervised guardianship will need to be created.  If family members are not in agreement with regard to who should act, the court proceeding could be contested. The cost of a family fight could deplete assets otherwise available for the minor.

A good estate planning attorney can come up with some low-cost solutions such as naming a testamentary trust as part of their existing will.

MISTAKE 4: WRONG AMOUNT OF COVERAGE CHOSEN

Most of our clients never realistically calculate the true cost to maintain survivors’ standard of living. Perhaps the most important life insurance-related question to be asked is this: Do you have enough liquidity to maintain the current lifestyle for a surviving spouse and other family members? Our office has very simple ways of showing our clients how to calculate this correctly.

If you would like more details call us at 847-461-6553. www.1035exchange.org