insurance – Experience a Richer Way to Wealth

Investing in life insurance is a foundational part of estate planning, and when done right it’s a primary way to say “I love you” to your loved ones after you’re gone. However, when naming your policy’s beneficiaries, several mistakes can lead to potentially dire consequences for the people you’re investing to protect and support.

The following four mistakes are among the most common we see clients make when selecting life insurance beneficiaries. If you’ve made any of these errors, contact us immediately, so we can support you to change your beneficiary designations on your policy and ensure the proceeds provide the maximum benefit for those you love most.

01 – Failing To Name A Beneficiary

Although it would seem common sense, whether intentional or not, far too many people fail to name any beneficiary on their life insurance policies or inadvertently name their “estate” as beneficiary. Both of these errors will mean your insurance proceeds must go through the court process known as probate.

During probate, a judge will determine who gets your insurance death benefits. This process can tie the benefits up in court for months or even years, depending on who the beneficiaries of your estate are under the law. Moreover, probate opens up the proceeds to creditors, which can seriously deplete—or even totally wipe out—the funds.

To keep your insurance proceeds out of court, make certain you designate—at the very least— one primary adult beneficiary. In case your primary beneficiary dies before you, you should also name a contingent (alternate) beneficiary. Name more than one contingent beneficiary for maximum protection in case your primary and secondary choices die before you.

Ideally, we often recommend that the primary beneficiary of your life insurance is the Trustee of a well-considered and thoughtful Trust Agreement to provide maximum benefit and protection for your heirs.

02 – Forgetting To Update Beneficiaries

While failing to name any beneficiary is a huge mistake, not keeping your beneficiary designations up to date can be even worse. This is particularly true if you’re in a second (or more) marriage and fail to remove an ex-spouse as beneficiary, which can leave your current spouse with nothing when you die.

To prevent this, you should review your beneficiary designations annually as part of an overall review of your estate plan and immediately update your beneficiaries upon events like divorce, deaths, and births. When you’re our client, we have built-in systems to ensure your beneficiary designations (along with all other documents and decisions in your plan) are regularly reviewed and updated.

03 – Naming A Minor (Or Their Guardian) As Beneficiary

You’re technically permitted to name a minor child as a beneficiary of your life insurance, but it’s never a good idea. Minor children cannot receive insurance benefits until they reach the age of maturity—which can be as old as 21 in some states. In the event a minor is listed as beneficiary, the proceeds of your insurance will be distributed to a court-appointed custodian, who will manage the funds (often for a not insignificant fee) until the child reaches the age of maturity. At that point, all benefits are distributed to the beneficiary outright and unprotected.

This is true even if the minor has a living parent. A child’s living parent could petition to the court to be appointed custodian. Still, there’s no guarantee that a parent would be appointed custodian, especially if the parent cannot qualify or pay for a bond. In many cases, a court could deem a parent unsuitable (if they have poor credit, for example) and instead appoint a paid fiduciary to control the funds.

Rather than naming a minor as a beneficiary, you may think to name the person you have chosen as guardian of your child. But that’s not the right answer either. In that case, all insurance would pay outright to the named guardian and could be used in any way they choose, or even be at risk of being taken in a divorce or by a judgment creditor of the guardian.

Instead, the right answer is to set up a trust to receive the insurance proceeds and name a trustee to hold and distribute the funds to a minor child you would want to benefit from your insurance proceeds, when and how you determine, or even hold them protected for your beneficiary to control but safe from divorce and creditors if you choose.

04 – Naming An Individual With Special Needs As Beneficiary

Although a loved one with special needs is likely one of the first people you’d consider naming as beneficiary of your life insurance policy, doing so can have tragic consequences. Leaving insurance directly to someone with special needs could disqualify that individual from receiving much-needed government benefits.

Rather than naming someone with special needs as a beneficiary, you should create a “special needs trust” to receive the insurance proceeds. This way, the money won’t go directly to the beneficiary upon your death. Still, it would be managed by the trustee you name and dispersed according to the trust’s terms without affecting benefit eligibility.

The rules governing special needs trusts are complicated and vary greatly from state to state, so if you have a child with special needs, meet with us today to discuss your options. In the end, special needs planning involves much more than just life insurance—it’s about providing a lifetime of care and protection.

Eliminate Future Problems Now

While naming life insurance beneficiaries might seem simple, if you’re not careful, you can create major problems for the loved ones you’re doing your best to benefit. Meet with us today to ensure you’ve done everything properly.

We can also support you in planning tools like trusts—special needs or otherwise—to ensure your insurance proceeds provide the maximum benefit for your beneficiaries without negatively affecting them. Schedule a Family Wealth Planning Session to get started.

This article is a service of Brittany Cohen, Personal Family Lawyer. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you’ll get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

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858-427-0539

If you earn a good living now, but you worry about not having enough money for a future time when you cannot work due to illness or injury, disability insurance is your answer. However, you need to make sure you’re getting an insurance policy that will meet your needs and not waste your money. This article covers 7 issues to consider when purchasing disability insurance.

Disability Insurance: Issues to Consider

The answers to these 7 questions can give you the best chance of finding a policy that is well-suited for your particular situation.

01 – What is disability insurance?

Disability insurance pays benefits when you’re unable to work because you’re sick or injured. Most policies pay a benefit that replaces a percentage of your income. But disability insurance isn’t the same as health insurance—it won’t cover your medical bills.

Instead, disability benefits replace a percentage of the income you lose due to your inability to work, so you can cover your basic financial needs, such as paying bills, covering daily living expenses, and providing for your family, until you can return to work. To begin your search for disability insurance, first you need to get clear about your minimum financial needs, or what we call your “minimum to thrive” number, should you become unable to work.

If you don’t currently know what your “minimum to thrive” number is, contact us for help calculating this number, and we can refer you to tools or an advisor who can support you.

02 – Should I get disability coverage?

If you’re the breadwinner in your family and your income would stop if you become ill or injured and couldn’t work, you should look into disability insurance. According to U.S. government’s statistics, one in four 20-year-olds become disabled before reaching retirement age. Statistics like this make it all the more important that you consider protecting yourself and your family with disability coverage.

03 – What’s the difference between short and long-term disability insurance?

There are two primary types of disability insurance: short-term and long-term. Short-term disability insurance typically lasts between 3 to 6 months, and sometimes up to a year or more. These policies generally cover about 60% to 80% of your monthly gross income, and the premiums you pay generally range from 1% to 3% of your annual income. One major upside to short-term policies is that payouts usually happen within two weeks, which can be a lifesaver in an emergency.

Long-term disability insurance can pay benefits for a few years or until your disability ends, even if that’s when you retire. Most long-term policies cover 40% to 60% of your monthly gross income, but policies that pay up to 70% do exist. Long-term disability policies also cost 1% to 3% of your yearly income, but based on the benefits, they tend to be more cost-effective in the long run.

That said, it can take up to 6 months to see a payout from a long-term policy, which may not be a realistic option if you need money immediately to cover your living expenses. Therefore, we recommend covering your short-term financial needs with emergency savings of 6 months, and then getting a long-term policy to cover your longer term needs.

04 – What does ‘portability’ mean?

If you purchase your disability insurance through your workplace, ask if you can keep that insurance if you leave the company. If your insurance is non-portable, your coverage will end when you leave the job. Having a portable policy means that you’ll be covered no matter where you work.

Although many disability policies purchased through an employer aren’t portable, it’s definitely something you should look into. If portability is important to you, consider purchasing disability insurance on your own, rather than through your employer.

05 – What are the renewal options for disability policies?

A “guaranteed renewal” policy allows you to renew, without making any changes to your coverage, but your premium can fluctuate. A “non-cancelable” policy means your coverage and your premiums cannot be changed, assuming you pay your premiums on time. Also, be sure to find out if premiums are waived during a qualified disability.

Given these considerations, the best policies will be non-cancelable and guaranteed renewable. Obviously, such policies will cost more, so consider what’s best for you, and if you need help making your decision, we’re happy to recommend a trusted insurance agent and then talk through the options with you.

06 – How do cost of living benefits work?

Cost of living benefits aren’t included in most policies, but adding this rider is definitely something to consider. Cost of living benefits are designed to provide financial stability by offering an increasing benefit to keep pace with an increased cost of living, which is especially important right now, when we’re experiencing unprecedented levels of inflation.

When choosing cost of living benefits, consider choosing policies that increase on a compounding basis. Compound interest is earned on the principal and the interest. This additional rider can help your benefits keep pace through inflation, even after your disability ends.

07 – Do I need a ‘future increase’ rider?

A future increase rider is another option to consider adding to your disability coverage. It’s worth looking into particularly if you think your income may increase significantly over time. With this rider, you’re able to increase the monthly benefit of your policy, regardless of your health status.

Without it, your policy won’t change to protect your future income, and your benefits will pay out according to your income when you first obtained coverage. That said, many insurance companies will limit the total supplementary coverage that can be implemented each year with a future increase rider, so even if you have this option in place, the benefits might not fully reflect your future salary.

Get help choosing your coverage

When shopping for a policy, it’s best to work with an insurance agent who can survey many different companies to help you choose the right policy for your budget, age, health, and other factors. Remember, you must have the policy in place before something happens—if you’re already sick or injured, you can’t buy disability insurance to make up for lost income.

One of the ways we support our clients is by discussing matters like this with you during your Family Wealth Planning Session, or at your annual or 3-year review meetings after you’ve completed your Life & Legacy Plan with us. If you don’t have an insurance agent you’re already working with, we can connect you with an agent we trust, and then provide objective counsel to help you decide on the best coverage for you and the people you love.

If you aren’t already a client, contact us today to schedule your Family Wealth Planning Session. If you are, and you’re ready for a review of your legal and financial choices, contact us for a plan review. We look forward to supporting your next step in Life & Legacy Planning

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858-427-0539