Life insurance may not seem very complicated, but a few key steps can help you avoid potential pitfalls.
First, have a conversation. 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.
Second, understand 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 your beneficiary on the policy.
Third, 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 large sums, in which case you may want to set up a trust.
Fourth, understand the exceptions. For example, 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.
Fifth, think about taxes. While life insurance proceeds are free from federal income taxes, they can be counted as 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.
We can help you understand the components of life insurance. Call or email us to discuss your policy needs.