Life insurance can serve a variety of purposes, but for most people their primary intent is to replace their income in the event of their death. A term life policy is often the solution many families need, to protect the other spouse or children if the worst should happen. But like anything else, there are right and wrong ways to handle your term life insurance policy. Watch out for these four pitfalls, to make the most of your plan.
Avoid rate increases. With a term life insurance policy, your rates are guaranteed for a period of time (10 or 15 years, for example). But when your initial coverage period is over, your policy may be set to automatically renew. At this point you may be billed a much higher premium. At this point you can request a rate decrease or cancel the policy.
Update your beneficiary designation. Unfortunately, you can’t just purchase a life insurance policy and then forget about it. The person you designated as your beneficiary ten years ago may not be the person who should inherit your assets today. Review your beneficiary designation on a regular basis, especially after events like a divorce, remarriage, death, or birth of a new child.
Not planning for Estate tax. If you own the policy and you’re the person insured by the policy, the insurance payout will be considered part of your estate. This means it can be subject to estate taxes. Planning for estate taxes, can include establishing an irrevocable trust, or name someone else as the owner of the policy. The rules for these maneuvers can be complicated, so consult with your insurance agent, tax professional and attorney before making a decision.
Failing to shop around. People sometimes purchase a life insurance policy via special offers from organizations to which they belong. You might assume you’re getting the best rate as a member of a certain organization, but that isn’t always the case. Remember to shop around and compare rates and benefits, just as you would for auto or homeowner’s insurance.