As a financial planner with Ashworth and Sullivan Wealth Management Group I have been conducting life insurance audits for our clients. These audits are now a routine part of the firms practice. In the most recent audit process, we discovered a number of mistakes that we have since corrected. The most common life insurance mistakes involved the amount and type of coverage and beneficiary designations.
Insurance agents are often accused of overselling or encouraging more coverage than people feel that they need. So it begs the question, what is the right amount of life insurance?
There is a simple answer to a question that seems to bewilder many advisors: insure something for what it is worth. Rather than debate the value of a human life we should consider the economic value that someone has to the ones that they love. There are calculators that can assist in this measure, but for a good rule of thumb consider the following:
- A person between ages 25 and 45 should have 20 to 30 times their income.
- A person between ages 45 and 55 should have 15 times their income.
- A person between ages 55 to 60 should own 10 times their income.
- Someone in retirement should have an amount equal to their assets.
TYPE OF INSURANCE
There are basically two broad categories in the style or type of life insurance that exist, but many of the individuals that I have seen lately have missed this in a major way.
- Term As the name indicates, this insures you for a term or period of time and will then expire without value at the end of the term.
- Permanent This lasts as long as you do. It insures you for your entire life.
Now there are many nuances to each of these that should be considered. One of the newest and most attractive features is living benefits that pay for Long Term Care coverage should it be needed later in life.
Yet because of the lure of low cost term insurance, many clients haven't considered the ramifications of retiring without life insurance coverage. This can result in a lower retirement income or withdrawal rate from retirement plans, which often cannot be reversed if they wait too long. At the very least, having only term life insurance can result in a loss of security and financial flexibility.
Beneficiary designation mistakes are subtle but can potentially have major ramifications. Insurance agents are often in the role of a salesperson and not that of an advisor or planner which can mean a lack of coordination between beneficiary designations and wills or trusts. (In full disclosure, I am not an attorney and yours should be consulted when reviewing your beneficiary designations.)
The most common mistake I see is when a married person names their spouse as the primary beneficiary or when a parent or grandparent names a minor or young adult as the primary beneficiary. You may say, Whats wrong with that? Potentially nothing. But properly structured testamentary trusts with the surviving spouse or child as the beneficiary offers greater protection to ensure that the beneficiary actually recieves the intended proceeds. This proper wording can provide a layer of protection against litigation and maybe even future spouses. The bottom line is that you should pay close attention to your beneficiary designations.
While there were other oversights and errors found, I have highlighted the three most common mistakes so that you may be spurred to take action and engage in a life insurance audit on behalf of your clients.
Todd Burkhalter is a financial planner and partner at Ashworth & Sullivan Wealth Management Group. He has worked in the financial service industry since 1997, and is a member of The National Association of Insurance and Financial Advisers, and a Licensed LEAP Practitioner. Email him directly at firstname.lastname@example.org.