Insiders’ Tips for Buying Life Insurance

Buying life insurance is hardly an everyday purchase — you may do it only once or twice in a lifetime. So you may not know all the ins and outs of this important part of protecting your finances.

But you can benefit from the knowledge of folks who deal with life insurance matters daily.

They see not only the confusion of customers just starting their life insurance search, but also the problems on the back end, when bad decisions come back to haunt buyers and beneficiaries.

Several experts shared the best life insurance advice they’ve ever given — tips that could save you from making costly mistakes.

Never name a minor child as a life insurance beneficiary

One of the best reasons for buying life insurance is to provide for children in case you’re no longer around. Here’s the problem: Minors can’t directly receive life insurance money. If you name a child as a beneficiary, “the life insurance company can tie the money up until the kid is 18. Then the child gets it — with no controls,” says Delia Fernandez, a certified financial planner and president of Fernandez Financial Advisory in Los Alamitos, California.

Fernandez recalls one father who named his young son as beneficiary of a $78,000 life insurance policy. The father died, and years later the young man received the funds at age 18. He blew through $57,000 of it on marijuana and trips to Las Vegas with his girlfriend, then had to spend the rest on rehab, she said.

Another young man received $75,000 from a life insurance policy when he turned 18 and immediately bought a sports car. But because he was young, no one would insure it. Nonetheless, he drove it to a party, where it was stolen, Fernandez said. Without insurance to cover the theft, he lost everything in just six weeks. “No one in the family can talk to him about that $75,000,” says Fernandez.

These mistakes can easily be avoided. Parents should create a life insurance trust for children that not only receives the money — no matter how old the child is — but also outlines acceptable uses. You can have the trust disburse specific amounts of the money at certain ages, like 25, 30 and 35.

While it may cost a few hundred dollars in legal fees to set up a trust for life insurance proceeds, it’s a good idea for young adults and essential for minor children.

[Life insurance quotes are available through NerdWallet’s Life Insurance Comparison Tool.]

Don’t let a former spouse use group life to satisfy a divorce settlement

If you have a divorce agreement that provides you alimony or child support, it’s a good idea to also make sure it stipulates life insurance on your ex-spouse. Otherwise, you’d lose that important income flow if your former spouse died.

But using group life insurance from a workplace is not a good choice, says Chris Chen, a certified financial planner at Insight Financial Strategists in Waltham, Massachusetts. Term life insurance is fairly inexpensive, maybe cheaper than you think. More importantly, it doesn’t hinge on a job.

“These days the likelihood of changing employment or dropping out of the workforce is reasonably high,” Chen says. “If you have to change jobs, you might not have group life insurance there.” Or you might find that you’re no longer insurable due to health issues.

Here are more divorce-related tips from Chen:

• The life insurance buyer can align the policy’s term to the years of alimony or child support required. If the divorce agreement provides for 15 years of child support, you can buy a term life policy for 15 years.
• If you don’t control your ex’s life insurance but are a beneficiary, your divorce agreement should state that the life insurance policy will keep you as “a party of interest.” That way if payments stop, you will be notified.
• Disability insurance for an ex-spouse can be even more important than life insurance. If your ex can no longer work due a disability, he or she can go to court and seek a reduction in support payments.

Before buying whole life insurance, compare term life quotes

“The only ones who really have great positive things to say about whole life insurance are insurance agents,” says Chris Huntley, president of Huntley Wealth & Insurance Services in San Diego. According to Huntley, personal finance experts generally agree that “you should buy term and invest the rest.”

Yet sales numbers show that permanent life insurance is hugely popular, indicating that life insurance agents are heavily pitching the product. Among U.S. households with life insurance, 50% own only permanent life, 32% own only term insurance and 18% have both, according to LIMRA, a financial services research group.

If you’re considering whole life insurance, Huntley suggests you also get quotes for a long-duration term life insurance policy, such as a 30-year term, or a policy that covers you to a specific age, such as 65. That way you can see what it truly costs to insure your life and separate that from the money you’d be paying for fees and the cash value portion of a whole life policy.

“Most people only need life insurance for 20 to 30 years,” typically to cover a mortgage, growing children or working years, Huntley says. “Talk to a financial expert about what you could do with the savings from buying term life insurance instead.”

Make sure your life insurance policy has ‘living benefits’

“Living benefits” have become a relatively common component of life insurance policies that allow you to access the death benefit money yourself while you are still alive under certain circumstances. Being able to tap into your policy this way could prove crucial if you become ill and need money to pay for living expenses or medical care, so make sure your policy has this feature, says Pamela Plick, a certified financial planner in Palm Desert, California.

Living benefits are generally considered “riders,” or policy extras, and include:

• An accelerated death benefits rider. This lets you access your payout if you are diagnosed as terminally ill. Rules vary but might include a life expectancy of 12 months or less, for example. It may be included with your policy or available for a small extra charge.
• A chronic illness rider. This lets you access your life insurance benefit without a diagnosis of terminal illness. Instead, eligibility to use the rider will generally depend on your inability to do two or more “activities of daily living,” such as eating, bathing and dressing.

Plick advises that you understand what life insurance riders are available to you and what you would need to do to claim the benefits.

Include payment with your life insurance application to make the policy binding

You don’t have to wait weeks for your life insurance application to be processed before coverage can begin. Include a check for the first payment with your application, and you’ll bind coverage retroactively to that day, says Marvin Feldman, president and CEO of the nonprofit education group Life Happens. It’s an easy way to make sure your family will have the financial safety net on the off-chance you die before your policy is processed.

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