Insurance planning is an act of generosity. It is done to protect our loved ones and to provide a safety net once we are gone. People take time from their busy schedules to work with an insurer but may try to hurry through the fact-finding process to save time.

Agents tend to follow the lead of the insured and may fail to thoroughly investigate his/her needs to speed things up. But there are some pitfalls in completing the insurance application that must be considered for an insurance policy to do its job properly even if the process takes longer in doing so. Without considering these very important details, the policy may be insufficient.  

  1. Consider who is being insured. Most people believe that the primary wage earner should be insured and this is correct. It is also important to consider the other member of the team.  Whether she earns a part-time salary or he is a house-husband, both parties in a marriage provide an important part of the lifestyle that needs to be protected should death occur prematurely. The extra income and the household responsibilities all have value and the surviving spouse would need to hire someone to do those duties. That being said, the secondary income earner may not need as much coverage as the major wage earner, but he or she should be insured as well.
  2. Underinsuring. It is difficult to see far into the future. But that is what is necessary when planning your life insurance needs. We can envision our near future, but going farther out  is a hazy fog filled with dreams and goals. It is important that the insurance bought today is appropriate to cover current expenses and needs and it is essential to build a buffer or cushion within it so that it can keep pace with rapid changes over time. Over-insuring is an easy solution, but the premiums must be affordable. The best course is to purchase as much insurance as you can comfortably pay for (use term insurance where appropriate to increase coverage) and then work with your agent to move some of that term insurance into permanent whole life as your job promotions and income increase. It is important that your insurance benefit provide enough value to assure that your family’s lifestyle will not be severely impacted by a sudden death.  
  3. Not considering the needs of the beneficiary.  Life insurance is usually bought while we are young. Our beneficiary choice is based on our current circumstances and typically follows tradition by naming a spouse or child/children. But tradition does not take into account a spouse who becomes a spendthrift. The minor child/children we choose as beneficiary are unable to handle the money responsibly. We want the best for our family but providing a huge amount of money in cash through a life insurance policy may not be the best solution. Examine the needs of your beneficiary before just listing them on the policy.  Perhaps a trust would be a better alternative that can offer a routine benefit check monthly. Maybe a custodian through an UTMA (Uniform Transfer to Minors Act) should be assigned to manage the benefit for a very young child or children. The point is to examine the needs of the beneficiaries and adjust your choices to provide the best payout possible for their situation.  

Life insurance is a valuable resource. It provides a large amount of money at a time when the family most needs it. However, a policy we think is fabulous may be ill-suited if it provides too little money or provides the money in such a way that it does not last. Serious discussions with your insurance agent should be done on a regular basis and your choices should be reviewed regularly. The time spent developing the best life insurance policy is worth it.

Mary Fox Luquette, MBA, CLU, ChFC is a finance instructor in the B I Moody III College of Business at the University of Louisiana at Lafayette.  

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