Life insurance is something that many of us don’t really want to think about. Doing so involves contemplating our demise. And while I like to think I’m going to live forever, that’s not the case. Accordingly, I’ve been diving into life insurance products recently, with certain life events making it clear that protecting the future for my kids is something that’s important to me.

Many reading this article may certainly feel a similar way, and protecting one’s family in the event of a tragedy is certainly something worth thinking about. Paying premiums to ensure that your loved ones will be cared for if an income is taken out of the picture is a good idea. But there are certainly a number of pitfalls that can befall anyone on this journey. 

There are many details that can make a big difference in how life insurance benefits are paid out, and a variety of factors that should be considered when taking on a new policy. Here are three of the biggest issues or mistakes I’ve found that are among the most common folks like me setting up new plans may fall prey to.

Key Points About This Article:

• A life insurance policy can be a big deal, allowing for peace of mind and ensuring that one’s family can be taken care of in the case of tragedy.
• However, there are a number of pitfalls those looking to put a new policy together may want to consider before jumping in with both feet.

Mistake #1: Failing to Update Beneficiaries

Life doesn’t stand still, and it’s the rollercoaster of life that can make things exciting. But many life events, such as marriage, having children, going through a divorce, or experiencing the loss of a loved one can be an event that’s enough to deal with on its own. That’s understandable.

However, failing to update one’s life insurance beneficiaries in the case of the examples above (and many others) can be problematic. The insurance pay out that one may have expected to go to one’s kids or new spouse may go to the wrong parties, or the government may be able to get their hands on the money (or the money could be frozen in the court system, which can be nearly just as painful in many cases). 

Making it a habit to review all financial assets annually (or on whatever schedule works best) is an easy solution to this potential issue. Setting up the policy can be the easy part – keeping it updated with the correct information can paradoxically take a bit more work.

Additionally, as life events happen, it’s important to update other information, such as what the beneficiaries may receive according to one’s current asset roll and who may get what when the time comes. Ensuring your assets are spread around to the right people can add even more piece of mind to this process. After all, that’s why the policy was taken out in the first place. 

Mistake #2: Naming Minors as Direct Beneficiaries 

I’m not going to spend as much time discussing this point, as it’s relatively self-evident. Having no safeguards in place when putting minors on a life insurance policy as a direct beneficiary can be very detrimental to the whole idea of passing down one’s wealth to the next generation. 

Having a significant sum of money at one’s disposal (in the jurisdictions where that’s allowed) can often do more harm than good. And in many cases, the court will order that a delegate handle the funds until the stated beneficiaries are adults, leading to obvious potential issues with how the funds are used/disbursed/invested over that time frame.

For those who don’t want to handle this burden, including an appointed guardian who may manage the funds is an important step to consider for those looking to name their kids as beneficiaries. Going a step further and indicating one’s wishes with how the assets the family wants to pass down will be invested (or stay invested) over that time frame is important as well. 

I’m looking specifically at a revocable living trust for this reason – it allows a family to name minors as beneficiaries, but also allows one to stipulate how much the kids will receive, at what time, and who the appointed guardian would be if both spouses pass away. Wills can often be structured in the same way, but there are other considerations like probate court investors will certainly want to think about as well. 

Mistake #3: Ignoring the Impacts of Taxation on Future Disbursements

The most important thing to consider when setting up a will or a trust is ensuring the funds will get paid out according to one’s wishes. However, after the funds are paid out, significant taxes can be imposed, particularly for those looking to hand down a large estate.

Many of us may certainly not find ourselves in this group, but after certain thresholds, taxes may be imposed by the federal and state governments depending on where you live. Additionally, estate taxes are going to be imposed by the IRS when passing down major assets like a house, so make sure to read up on these stipulations and look for ways to minimize the tax burden on your kids.

This is the part where I’d certainly recommend talking to a financial planner, and that’s a step I’m going to undertake for myself. The added complexity here is that the tax code is always changing, and there has been talk from the Biden administration that various thresholds may be changed, so this is something I think all investors will want to keep on the radar and potentially add to that annual financial review checklist. 

Wrapping It Up

Thinking about how beneficiaries are selected, who may be an appointed guardian, and what the tax implications are of future life insurance payouts are the little things that can make a big difference in one’s planning journey. This article touches on some important topics, and is intended to be a thought-provoking exercise for those going through a similar process as myself.

As mentioned, I’d encourage all readers to talk to a tax or finance professional about how to structure their life insurance policies and overall investments. Every family is unique with unique wishes and expectations for how this process will shape up. Thus, there’s no one-size-fit all piece of advice anyone can really give.

That said, the fact that you’re reading this indicates you’re ready to start the journey. One thing I can say for certainty is that having a will or a trust in place is a good move, and one that will pay off in a big way for your loved ones. 

A Quote in Minutes

Even if you’re in a similar financial position and unsure about the exact amount of coverage needed, it’s always wise to get a quote and explore your options.

A quick, no-obligation quote can provide valuable insight into what’s available and what might best suit your family’s needs. With affordable rates and customizable policies, life insurance is a simple step you can take today to help secure peace of mind for your loved ones tomorrow.

Click here to visit our website and learn how to get a quote in just a few minutes.

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