column is devoted to your personal and business
life insurance. Each mistake has two things in
common: first, potentially serious consequences
in terms of both expense and aggravation; and
second, each can be avoided or corrected quickly
and inexpensively if found in time. The IRS does
not care if you make these mistakes, but those
who must make do with less or with nothing care
deeply about them. Previous columns have outlined
common life insurance mistakes. Here are others:
The amount of your personal coverage is inadequate
for your family’s financial security goals.
Who’s going to pay for your family’s
food, clothing, shelter and education costs for
the next X years? (Figure roughly that to raise
a child through age 21— excluding college
costs — the average cost exceeds $250,000,
with about $70,000 for food alone!) Will those
you love have enough after taxes, the payment
of debts and other expenses to just go on living?
If you haven’t recently checked, how do
Obtain a no-nonsense insurance analysis of what
you have and what your family will need if you
die — and what you would need if you became
disabled. A couple of hours with a competent professional
may save your family’s financial way of
life. Over and above all the amounts necessary
to keep your family at the standard of living
you feel is appropriate, consider having your
spouse own and be beneficiary of life insurance
equal to at least one year’s gross income
on your life. This is what is often called a “Survivor’s
Shock Absorber.” Psychologically, this “buys
time” for the surviving spouse to adjust.
He or she knows that — financially, at least
— for one whole year nothing has to change
and no snap decisions are necessary about moving
or making radical adjustments in lifestyle.
Your policy is payable
outright to your minor children or grandchildren.
Improper disposition of assets is one of the most
frequent and serious of all estate planning errors.
It occurs when the wrong asset goes to the wrong
person at the wrong time in the wrong manner.
Equal is not necessarily fair. Perhaps your children
have different needs. Should they all receive
equal shares of your life insurance? Should they
receive their shares outright? Are they currently
mature enough to handle such a large amount? Are
they sophisticated enough to invest it wisely?
In many cases, state law will tie up those proceeds
and make it expensive or time consuming for minor
beneficiaries to use the money. Why? Because minors
are under a legal disability. No insurance company
will knowingly pay large amounts outright to minor
children. So a guardian or custodian will have
to be appointed by a court at your children’s
expense to dole out their money to them.
Often, the best solution is to set up a trust
for your spouse and children and name the trust
as the recipient of your life insurance proceeds.
You can build in a great deal of flexibility and
sidestep a number of the legal restrictions imposed
on outright distributions. This is a much safer
and surer way to provide financial security for
those who can’t or don’t want to handle
large sums of money or other assets. A very cost-effective
alternative, where the amount involved is more
modest (or for any reason a trust is impractical
or not desired), is to have the insurer pay out
policy proceeds under what is called a “settlement
option,” which provides a steady and consistent
small amount of cash monthly over a long period