One of the most important factors to consider when shopping for life insurance has absolutely nothing to do with the actual policy or price.
In fact, it has nothing to do with anything other than a few simple choices made by the individual prior to completing the forms. However, those simple choices can save thousands or even tens of thousands of dollars in the event of a claim.
Following are some quick tips to help you maximize payouts and prevent common life insurance policy problems:
Carefully consider who owns the life insurance policy before purchasing. For example, many small-business owners or traditional employees rely exclusively on employer-provided life insurance policies. While these may be cost-effective in the short term, the long-term costs are often substantially higher due to taxation of benefits.
Calculate the total cost of purchasing employer-provided insurance versus a self-purchased or individual policy by comparing after-tax benefits.
It’s important to clearly identify the beneficiary well in advance and make sure changes are recorded in a timely fashion to avoid the costly and time-consuming problems associated with probate. However, it’s equally important to consider how the funds should be dispersed.
In the event of a claim, the beneficiary will be required to decide which payout method best meets his or her needs. Lump sum, life income, interest income and partial payment with contingencies are just a few of the available options.
Life insurance proceeds may be subject to estate taxes. With rates as high as 45%, it’s important to maintain a limit of $3.5 million to any one individual.
Instead, consider assigning ownership to a spouse, adult child or other individual in order to minimize estate taxes.
Check with your tax professional for more details about your specific situation.