Return to the "POINTER VIEW"June 22, 2001
Return to the "POINTER VIEW"
June 22, 2001
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Well, the summer of ’01 looks to be a great one. The ‘76ers showed the world their heart. The Phillies and Red Sox are still in first place. And Murphy’s Law is stepping up to the plate with part three on the basics of life insurance.
Last time, we discussed the major differences between types of life insurance. Today we are going to look at some additional life insurance considerations. Remember the basics though -- you should obtain the appropriate amount of insurance to cover your family’s financial needs in case the Big Manager in the Sky suddenly takes you out of the game.
Who should be the beneficiary of the insurance policy?
Making beneficiary decisions can have enormous ramifications for your family.
An insurance policy is a contract. Proceeds are paid out in accordance with the terms of the policy, not your last will and testament. Although your spouse will be the primary beneficiary in most cases, it is important to make appropriate changes if you become separated, divorced or widowed (more than one ex-spouse has received an unintended insurance windfall).
Soldiers who have recently married should also review their beneficiaries -- removing parents and siblings and adding a newly acquired spouse. Do you know who your beneficiaries are? If not, you should review your policies.
What happens if the spouse predeceases you?
If your primary beneficiary dies before you, or along with you (think about a car accident, for example), the contingent beneficiaries receive the policy proceeds. A child’s share will be given to a trustee until the child reaches the age of 18 -- unless you have contacted our hard-working legal assistance attorneys and they have set you up with a testamentary trust in your will. You can do this by calling 938-4541 to make an appointment.
Consider if you have three children ranging in age from 5 to 15. Do you really want your N’SYNC-loving 15 year old to get one-third of your $250,000 SGLI policy (or $83,333) when he or she turns 18? By establishing a testamentary trust (one created at your death), you can ensure someone you appoint --not the courts -- will manage the money. The trustee can make payments to schools and guardians during the time period the trust is in effect. You can also prevent any trust liquidation until each child reaches a certain age when they can better handle the money. Or, you can have the children’s testamentary trust remain in effect until the youngest child, the 5 year old, reaches a certain age, say 21 years old.
Is it fair that the oldest child, the 15 year old in our hypo, has to wait until he’s 31 years old to get "his share"? Absolutely! Your primary concern should be the welfare of your children while they are young and in need of care. When your youngest child reaches a certain age, each will get his or her equal share (or any share you deem appropriate in the trust).
Also, if things go as planned, maybe you’ll retire and buy a huge RV to travel across the country. Chances are your kids won’t get anything but postcards as you spend their inheritance. There is nothing wrong with planning to take care of your younger children in the event your road trip in life ends sooner than expected. Again, legal assistance attorneys can discuss different estate-planning options with you -- particularly if you have children from prior marriages.
Who should not be listed as a beneficiary?
In addition to ex-spouses, you generally don’t want insurance-policy proceeds to be paid to your estate.
If the insurance company pays a beneficiary directly, your creditors cannot take a dime. If it goes into the estate, your creditors can take money you planned to give someone else.
For example, if the cause of your death is a car crash where you were at fault, your estate could be sued. By listing specific beneficiaries in your life-insurance policy, you avoid the possibility of someone else taking your insurance-policy proceeds (such as the individual involved in the car crash).
Similar to a baseball pitcher’s earned-run average, insurance-policy beneficiaries will not get charged with mistakes that may be inherited from your estate. Secondly, you don’t want to designate a beneficiary you believe will "take care" of your affairs -- someone who will direct the policy proceeds to the people you really care about. That person not only has no legal obligation to "spread the wealth," but they could also have their own creditor problems when they receive their new assets.
Should children have life insurance?
Remember back to the first column on insurance? Insurance is intended to cover the financial costs and/or loss of income incurred due to a person’s death. Unless you’re the parents of some movie star, you aren’t relying upon your children for income.
Some parents do have a child insurance rider on their term insurance policies. This rider does two things. First, in the unfortunate case of a child’s death, the insurance policy (usually $10,000 or less) will cover burial and transportation expenses. Secondly, if the child becomes uninsurable due to an illness or medical condition, most child riders can be converted to a specified insurance policy (usually a multiple of the basic rider). This will allow the child to have some level of insurance coverage. Children do not need large insurance policies. Savings bonds and the rookie cards of the current Philadelphia Phillies are a much better investment for a child than a small whole-life policy.
Should I get a double indemnity clause with my policy?
Unless you plan on staring in a B-movie whose script depends upon your accidental death, it’s usually a horrible idea if it costs anything extra. Your insurance needs aren’t increased if you die in a tragic accident. In fact, accidental death may be less of a financial impact than a death due to natural causes. Double indemnity or accidental death clauses are gimmicks that make money for insurance agents. If they try to push such clauses, push them out the door like George Steinbrenner does with his unproductive players.
What about credit life, cancer and mortgage policies?
Generally, these additional policies are about as smart as standing in front of Roger Clemens when he is holding a shard bat. Don’t get them. They are expensive, have more loopholes than the NBA’s salary cap and are extremely expensive forms of insurance. You can always do better with a good term insurance policy than these gimmicky deals. Also, you’ll have more flexibility in dealing with the proceeds. For example, not only is mortgage insurance very expensive, but also, in the event of your death, your spouse may have other, more urgent needs. Definitely consider your debts when determining the appropriate amount of insurance, but cover those debts with life insurance.
Should I get a disability waiver for my policy premium?
Put that amount in your bank. A waiver of the premium on a $200,000 whole-life policy will cost more than $100 a year and only kicks in after you are disabled and can’t make payments for 6 months.
How do I get the best deal in insurance?
Shop for it. The Internet is a remarkable resource and all you need to do is fire up a search engine and ask about life insurance. Get quotes from multiple companies and don’t let yourself get pressured to make a decision when the agent is in your living room. Tell agents that you would like to mull it over, that you want to discuss their proposals with your sports-savvy lawyer and that you’ll get back with them. Don’t always swing at the first pitch!
For the past several issues we covered life insurance from assessing your needs, to discussing the various types available and addressing additional considerations. Now’s the time to make some decisions. Remember, while life insurance is only part of your estate plan, it’s an important part -- especially in light of our duty to fight and win our nation’s wars.
