Life insurance may not seem very complicated, but the process of purchasing a policy can be filled with potential pitfalls. Here are five to consider.
The conversation. First, discussing life insurance with your loved ones can be difficult because you are referring to the possibility of your own death. But if you have loved ones who rely on your income, it is an important conversation to have.
The role of your will. Many people believe a will can be used to dictate where life insurance proceeds will go, but that is not the case. Your life insurance policy is a contract with an insurance company, so you will need to specify beneficiaries with that company.
The beneficiary. Regardless of the policy you choose, you will need to select a beneficiary who will receive the proceeds of your life insurance policy when you die. That, too, can be an uncomfortable discussion. Typically, your beneficiary will be your spouse, then your children. But, at times, it can be more complicated. For example, you may not want to leave minors millions of dollars, in which case you may want to set up a trust.
The exceptions. In “community property” states, any property acquired during a marriage is owned by both spouses. In those states, if you want your life insurance beneficiary to be someone other than your spouse, both of you will likely need to acknowledge that in writing.
The taxes. Finally, although you won’t pay taxes on the payout from a life insurance policy, the proceeds may be considered part of your estate. This means they may be subject to estate tax. If you have a large policy, you may want to consider a trust to keep the proceeds out of your estate.
Life insurance can be a challenge to navigate. We’re here to help you navigate the pitfalls, and we’re just a call or email away.