Personal Life Insurance – 5 Small And Costly Common Mistakes

In his classic economic treatise, The Wealth of Nations, Adam Smith speaks to the frequency of virulent disagreements among heirs over who was entitled to the clothing of the deceased. So valuable was fabric in the 18th century it is no wonder that tailors shared the mantra, “Measure thrice, cut once.” Given the cost of textile products, a mistake at the start must be avoided.

And so it is with getting life coverage in force. A checklist of common, but costly, mistakes can help an advisor measure carefully.

Consider five oversights that can cause significant problems – and how we can help you:

1. Don’t make creditors the beneficiary – Carriers apply the insurable interest standard to beneficiaries as well as to policy owners. And while a creditor has a financial interest in the insured, they do not have a legal insurable interest. Read further and then call us.
2. Inform policy owners that collateral assignments are “draconian” – A creditor’s interest can be secured by a collateral assignment. But clients must understand the broad control assignees have over almost every aspect of the policy until it is released. We will help you file the assignment and explain the arrangement to your clients.
3. Don’t assume the insured will die first – All policies should have both contingent owners (unless the insured is the owner) and contingent beneficiaries. Contingencies can get complicated and usually involve extra paperwork. We will help with proper drafting and filing.
4. The probate court is not your friend – But your death benefit will end up in the court, and the public record, if “the estate” is the beneficiary. We will help you find alternatives that will have the desired results.
5. Two’s company, three’s a crowd – If the owner is not the insured make sure that the owner is also the beneficiary. If the non-insured owner names a third person as beneficiary it will trigger either an income or gift tax event at death. Either could be bothersome as best, costly at worst. We will help plan to benefit the third person in other ways.

Call with any questions concerning policies being put in force. We will discuss the issues with you, your clients, and their advisors. Contact Tom Virkler, JD, Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.

For What’s It’s Worth: Also, thank early tailors for the phrase “rule of thumb.” When estimating clothing size, the seamster would measure the circumference of the client’s thumb-knuckle, then double that for the approximate circumference of the wrist, double it again for the neck, and double once more for the waist. Check it out!