In my role as a Consultant with DDS Financial I have been conducting Life Insurance Audits, now a routine part of the firms practice. There have been a number of mistakes that the Audit process has brought to light and that we have since corrected. There are 3 most commonly made mistakes that I wanted to highlight so that you may be spurred to take action and engage in a Life Insurance Audit.
The Wrong Amount of Insurance
Insurance Agents are often accused of overselling or encouraging more coverage than people feel that they need. So it begs the question, what is the right amount of Life Insurance? There is a simple answer to a question that seems to bewilder many advisors; insure something for what it is worth. So as to not debate the value of a human life we should consider the Economic Value that someone has to the ones that they love. There are calculators that can assist in this measure, but for a good rule of thumb consider:
- A person between ages 25 and 45 should have 20 to 30 times their income.
- A person between ages 45 and 55 should have 15 times their income.
- A person between ages 55 to 60 should own 10 times their income.
- Someone in retirement should have an amount equal to their assets.
Many of the individuals that I have seen lately have missed this in a major way. There are basically two broad categories in the style or type of Life Insurance that exist.
- Term – As the name indicates, this insures you for a term or period of time and will then expire without value at the end of the term.
- Permanent – As the name indicates, this insures you for your entire life. It lasts as long as you do.
Again to not be accused of oversimplifying there are many nuances to each of these that should be considered. One of the newest and most attractive features are living benefits that pay for Long Term Care coverage should it be needed during life.
It seems that the lure of a low cost term insurance has caused many to not consider the ramifications of entering into retirement without life insurance coverage. The ramifications typically result in a lower retirement income or withdrawal rate from retirement plans…. Not fun and often can’t be reversed if you wait to late! At the very least going through life with term insurance only can result in a loss of security and financial flexibility.
The mistakes that are made with Beneficiary Designations are subtle but can potentially have major ramifications. Insurance Agents are often in the role of a salesperson and not that of an advisor or planner. This sometimes causes a lack of coordination between beneficiary designations and wills and or trusts. In full disclosure, I am not an attorney and yours should be consulted when reviewing your beneficiary designations. The most common mistake that I see here is when a married person names their spouse as the primary beneficiary or a parent/grandparent names a minor/young adult. You may say, “What’s wrong with that?” Potentially nothing, but properly structured testamentary trusts with the surviving spouse/child as the beneficiary gives greater protection for he/she actually getting the proceeds that were intended for them. This proper wording can provide a layer of protection against litigation, maybe even future spouses etc. Bottom line is that you should pay close attention to your beneficiary designations!
These 3 Mistakes in Life Insurance: 1) the wrong amount of coverage. 2) the wrong type of coverage and 3) improper beneficiaries were the three that were most commonly found problems in our recent Audits. There were many other errors and oversights that surfaced.
Take the time to have your policies reviewed so that you have a greater peace of mind. Contact me to set up a free consultation.