Term Life Insurance Articles

Top Mistakes Financial Planners Make Regarding Term Life Insurance

2010-07-13

Financial planners unintentionally enact consequential errors in estate planning causing contention, worry, and expense. Many of these errors involve term life insurance benefits. These omissions result in IRS commissions, windfalls for state tax coffers, and the cost and delay of probate courts. Estate planners are entrusted with the insured's wishes and beneficiary's future; they must be cognizant of common and avoidable errors. It is equally important for the client to be informed; estate planning is a partnership between the client, financial planner, and indirectly the beneficiaries.

First, the insured's "estate" should not be named beneficiary of term life insurance. Upon the insured's demise, most state laws mandate that disbursement be determined by probate courts, subject to inheritance or estate taxes. Additionally, this designation makes the proceeds from the policy subject to creditor claims and outstanding debts. However, if there is a "named" beneficiary, most states offer a full exemption regarding creditor claims.

Second, there should be a primary beneficiary and at least two unambiguous, contingent beneficiaries stipulated in an insurer acceptable manner. Adopting the "rule of two" protects young children by also naming alternative executors.

Third, to ensure that beneficiaries are protected and receive the intended proceeds, it is wise to set up an "irrevocable trust". This option offers considerable ductibility and elasticity while eluding many legal constraints that are dictated and exacted regarding monetary disbursements.

Fourth, a financial planning professional should ensure that the beneficiary on the term life insurance policy is current; the policy should be reviewed every 1-3 years, but definitely with every new marriage, the death of a spouse, the birth or demise of every child. This oversight has caused financial hardship, worry, and years of litigation especially when one spouse becomes divorced, remarries, and dies, with the ex-spouse named as sole beneficiary.

Furthermore, certifying that the beneficiary designation is current is critical. Children born after the beneficiary designation is instituted can be problematic if the insured deceases before the oversight is corrected: this child or children are omitted.

Financial planners give clients a sense of security and the peace of knowing that their loved ones will be provided for in the event of their death. Consequently, as financial planners theoretically assume responsibility for the financial future their clients, loved ones, or significant others, it is imperative that they be creditable, and "study to show themselves ". They must be conscientious, informed, aware, educated, and exceed the expectation of excellence by making certain that there are not any avoidable errors that will invalidate the trust and duty that has been consigned to their care.