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ByCurtis Watts

Life Insurance Myths Debunked

Misconceptions and misunderstandings have perpetuated a number of life insurance myths over the years and prevented consumers from getting the cover they need. They see life insurance as something that it’s not, believing it to be out of their reach because of their lifestyle and their budget, or believing that it’s something it’s not.

If you have dependents, want them to live comfortably, and don’t have assets or funds to give them, you need life insurance coverage. And if you have been avoiding life insurance because of something you’ve been told or something you believe, it’s time to dispel those beliefs and get to the truth of the matter.

Myth 1: Life Insurance Premiums are Expensive

One of the most common myths concerning life insurance products is that they are too expensive. It only makes sense, to the uninitiated at least. After all, if they’re promising a death benefit of $200,000 over a twenty-year period, it stands to reason that they would seek to claim at least 25% of that balance to guarantee a profit.

In fact, a recent study found that consumers who had never purchased life insurance overestimated the premium costs by between 400% and 500%. That’s a massive difference.

If you’re in your 20s or 30s and are relatively healthy, you can get 20-year term insurance for less than $20 a month, and if anything happens during that term your beneficiaries will get $200,000. Life insurance companies can afford to offer such huge payouts and low premiums because the chances of a young person dying during that term are very slim.

Assuming you’re paying $20 a month for a 20-year term life insurance policy, this means you’re paying $4,800 over the term, or 2.4% of the total payout. However, the odds of a 20-year-old woman dying during this time are 1.42%, and these odds drop significantly if you remove smoking, drinking, risk-taking, and pre-existing conditions from the equation.

In other words, while it seems like a huge sum and a huge discrepancy, it still falls in favor of the life insurance company.

It’s a similar story for a 30-year-old. The odds of dying during the term are higher, but only just, as they are still less than 3%, leading to higher premiums but a great rate overall.

The older you get, the greater your risks become, but insurance companies want your money. They need you to sign on the dotted line, so they will continue to offer competitive prices. 

Keep this in mind the next time you purchase life insurance and are suspicious of the significant amount of coverage provided in relation to the cost.

Myth 2: It’s All About Money

Financial protection is important. You need a coverage amount that will cover the needs of your loved ones while also securing low premiums to make life easier for you. However, the generosity and cost of life insurance are the only factors to consider.

It’s important to consider the financial rating of the insurance company, which is acquired using a system such as A.M. Best and Moody’s. These ratings are used to determine the financial strength of a company, which is key, because you’re relying on them being around for many years to come and being rich enough to pay your death benefit when you die.

Myth 3: It’s All About the Death Benefit

While term life insurance policies are solely about the death benefit, which is paid upon the policyholder’s death, there are other options available. Whole life or permanent life insurance policies work like savings accounts as well as life insurance policies. They accumulate a cash value over the duration of the policy and the policyholder can cash this sum at any point.

If they do so, they will lose the potential death benefit and the policy will cease to exist, but it’s a good option to have if you ever find yourself in dire need of funds.

Myth 4: Insurers Find an Excuse Not to Pay

There was a time when pretty much all life insurance policies were reviewed upon the policyholder’s death. Thankfully, this changed with the introduction of a contestability period, which begins at the start of the policy and typically runs for up to 2 years.

If anything happens during this time, the policy can and will be reviewed and if any suspicions are raised, it will be contested. However, if this period passes, there is little the insurer can do. More importantly, if the policyholder was honest during the application process and the type of death is covered, the payout will be made.

The truth is that the vast majority of policies do not payout, but this is because the policies expire, the cash value is accepted, or the policyholder outlives the term. For policies that actually result in a death, the majority do payout. 

And why wouldn’t they? A life insurance company can expect to turn a profit via the underwriting process. It doesn’t need to use underhanded tactics or rob your loved ones of a payout to stay in the black.

Myth 5: My Dependents Will Survive Without Me

According to LIMRA, a research organization devoted to the insurance and financial sector, most Americans either have no coverage or not enough coverage. In both cases, they may assume their families will survive without a payout or that a small payout will be enough. There is some logic to this belief as it often comes after they perform a quick calculation, but that calculation is flawed.

Let’s imagine, for instance, that you’re a 35-year man with two children aged 5 and 7 and a 35-year-old wife. You earn $40,000 a year and your wife earns the same. You have a $150,000 house and a $100,000 mortgage.

After doing some quick calculations, you may assume that your wife’s salary will be enough to keep her going and ensure your children are looked after until they are old enough to care for themselves. You don’t have any debt to worry about and the only issue is the house, so you settle on a relatively small death benefit of $100,000.

But you’re making a lot of potentially dangerous assumptions here. Firstly, anything could happen between now and your death. On the one hand, you could comfortably pay off the mortgage, but on the other hand, inflation could rise to a point where $100,000 is a fraction of what it once was, and debts could accumulate. 

Your wife could also lose her job, and if that doesn’t happen when you’re alive and can get more cover, it might happen when you die, and she’s so overcome by grief and the stress of raising two children that she’s forced to give it up.

And then you have to think about your children. What if they want a college education? Can your wife afford that on her own? And what about your funeral or your children’s weddings? What happens if one of them falls ill and incurs huge medical expenses? 

$100,000 is a lot of money to receive as a lump sum, and if you only think in terms of lump sums you may never escape that mindset. But it’s not a single sum designed to be spent freely and enjoyed. It’s a sum designed to last your loved ones for many years and to ensure they are covered for most worst-case scenarios.

By the same token, you shouldn’t assume that your loved ones will survive without you just because you’re not the breadwinner or you have paid off your mortgage. Things can turn ugly very quickly. It only takes a few unexpected bills for things to go south, at which point that house could fall victim to an equity loan, a second mortgage, and eventually be owned by the bank when your loved ones fall behind.

Myth 6: Premiums are Tax Deductible

The premiums of an individual policy are not tax-deductible. However, there are exceptions if the individual is self-employed and using the coverage for asset protection. It’s also worth noting that the death benefit is completely tax free.

Myth 7: You Can’t Get Insurance Above a Certain Age

The older you are, the harder it is to get the financial protection that life insurance can provide. But it’s not impossible, just a little bit more expensive. Your insurance needs increase as you get older and life insurance companies have recognized this. They provide short-term policies specifically tailored to seniors. 

Known as Seniors Life Insurance or Final Expense Insurance, these policies provide a low lump sum payout, often less than $50,000, that can be used to pay for a funeral or to clear debts. You can even pay it directly to the funeral home and arrange your own funeral. 

You may also still qualify for a term life insurance policy. Of course, traditional whole life insurance policies are out of the question, and if you have a health condition you may be refused even a short term policy, but don’t give up before you do your research and check your options. 

This is something that most insurance agents will be happy to help you with.

Myth 8: Young People Don’t Need Life Insurance

Life insurance provides you with peace of mind. It aims to provide cover during a difficult time and ensures that your loved ones have financial support when dealing with your death. If you have dependents, then it doesn’t really matter how old you are. It’s true that you will probably outlive the term if you are young and healthy, but no one knows what’s around the corner.

Death is a certainty; the only question is when, not if. By not purchasing life insurance when you have dependents, you’re rolling the dice and placing their future at risk.

The younger you are, the cheaper the premiums will be and the less of an impact they will have on your finances. What’s more, you can also opt for whole life insurance, locking a rate in early and avoiding the inevitable regrets when you’re 60, don’t have any cover and are being quoted astronomical premiums.

Myth 9: You Won’t Qualify if you are in Bad Health

If you have been diagnosed with a terminal disease, it’s unlikely that any insurer would cover you. However, if you have survived a serious disease or have a pre-existing medical condition, you may still qualify.

It’s all about risk, and if the insurer determines you’re more likely to survive the term than not, they will offer you a policy based on those probabilities. The less healthy they consider you to be, the more premiums you will pay and the lower your death benefit will be. But you can still get a worthwhile policy and it might be a lot cheaper than you think.

Myth 10: If You Have Money, You Don’t Need Insurance

If you have assets to leave your heirs, a life insurance policy is not as important as it might be for a stay at home parent or a low-income couple. However, it still has its uses. 

For instance, many high-income households have a lot of debt, and while the assets can typically cover this debt, it will eat into the estate. There are also estate taxes and legal fees to consider, all of which can significantly reduce the value of the estate.

In this case, a short term policy can provide some additional coverage and ensure that those extra costs are covered.

Myth 11: The Money is Lost if there are no Beneficiaries

If you die with no beneficiaries, the money will likely go to your estate, at which point the probate process will begin. If you have a will, this process will be relatively quick and painless, and your designated heirs will get what they are owed. 

If not, things could get messy and the process will be slow. What’s more, if you have any debts, your creditors will take what they are owed from your estate, including your death benefit.

Adding a beneficiary will prevent all of this, but don’t expect the insurer to contact your beneficiary and let them know. They expect the beneficiary to come to them. It’s important, therefore, to assign at least one (and preferably more) beneficiary and to make sure they know of the existence of the policy.

Summary: Life Insurance Myths Debunked

Now that we’ve debunked the myths concerning life insurance, it’s time for you to get out there and get the cover you need. The type of life insurance you need, and the amount of death benefit you will receive, all depends on your personal circumstances and health. 

This is a subject we have discussed at length here at PocketYourDollars.com, so check out our other guides on the subject.

Life Insurance Myths Debunked is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

ByCurtis Watts

What Is A Contingent Beneficiary?

A contingent beneficiary is a person, estate or trust that receives the assets of a person who dies if the primary beneficiary, for any reason, cannot receive the assets.

It is commonly recommended by attorneys when their clients are making a will to have at least one contingent beneficiary.

It is possible to have several contingent beneficiaries and they can be listed in a specified order.

After a person dies, his or her assets will usually go through probate. The probate process can be avoided and the assets more efficiently passed to the heirs if primary and contingent beneficiaries are named.

While the contingent beneficiary is one of the most important factors of the life insurance policy process, it’s typically one of the most confused and misunderstood. Any mistakes or misunderstandings can lead to a lot of problems down the road that can cause major headaches for your loved ones.

Why It’s Important To Name Contingent Beneficiary

There are a few key reasons why it’s important to name a contingent beneficiary.

Beneficiaries take precedence over wills

If a beneficiary is assigned to a bank account, that beneficiary has the rights to that account after the owner’s death even if the will states the assets in that account should go to someone else.

Contingent beneficiaries can also be assigned to retirement plans, annuities, and life insurance policies

There will be one primary beneficiary on the policy. This is usually a spouse or partner. They receive the proceeds from the policy upon the death of the policyholder. If a contingent beneficiary is named such as a child or other family member or friend of the deceased and the primary beneficiary cannot receive the proceeds, it will pass to the person next in line.

Electing a contingent beneficiary in wills as well as in insurance policies is a simple way of making sure the surviving loved ones are cared for if the primary beneficiary is incapable of doing so.

Provides a way to donate to a special cause or charity

It is also a way to donate to a special cause or charity after the death of the policyholder. The disposition of assets is not complicated by unforeseen events such as the death of the prime beneficiary.

For example, if a will gives all the deceased’s assets to the spouse as the prime beneficiary, but the spouse is incapable of managing the assets, they can be given to the contingent beneficiary, who may be an adult child, on the condition that the child cares for the spouse during their lifetime. After the spouse dies, the assets can go to the child.

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Circumstance Where A Second Beneficiary Makes Sense

There may be circumstances or stipulations that must be met before a contingent beneficiary may inherit the assets. The contingent beneficiary may need to finish college, reach a certain age or kick a drug habit, and only then they will receive the assets.

A policyholder and their primary beneficiary may die at the same time. This could happen in a car accident or natural disaster. If a contingent beneficiary has been named, the transfer of assets will be easier.

The next in line is usually someone who is financially dependent on the policyholder, but if there is no one dependent, the contingent beneficiary can be anyone else or a charity or cause. It is not advised to make the estate the contingent beneficiary of an inexpensive life insurance policy because the proceeds would be subject to the deceased’s creditors. Life insurance proceeds paid to a person are not usually subject to creditors.

If the primary beneficiary is the spouse, the contingent beneficiary may be a minor child. Consideration needs to be given as to who will manage the assets until the child reaches 18 or 21 years.

It is recommended to assign two guardians for the children including one guardian to manage the money and one guardian to look after the well-being of the child.

In policies from some of the best term life insurance companies, a person can assign a primary beneficiary, a contingent beneficiary, and a tertiary beneficiary. This is another kind of contingent beneficiary and only receives assets or proceeds from the estate or insurance company if all the primary and contingent beneficiaries are unqualified to receive the benefits or are deceased.

When a contingent beneficiary wants to claim assets, they need to provide a certified death certificate for the prime beneficiary and any other contingent beneficiaries that precede them on the list of succession as well as valid personal identification.

Each insurance company might require different documentation depending on their standards. When you name a secondary beneficiary, you need to ask what the requirements are going to be.

Consequences For Not Naming Beneficiaries

There are a few consequences for not naming beneficiaries.

Insurance proceeds could be subject to huge estate taxes

Insurance proceeds could be subject to huge estate taxes if the policyholder names the spouse as sole beneficiary and there is no contingent beneficiary. If the insured outlives his or her spouse, by a few days if they are both in a car accident, the proceeds will pass to the estate incurring huge unnecessary taxes.

If you don’t name a beneficiary, your other family members or loved ones can lose thousands and thousands of dollars because of the taxes that are going to be placed on the payout from the policy.

Your loved ones may struggle to get the money you left them

The other problem is that your loved ones could struggle to actually get their hands on the money itself. Without naming a contingency, the company is going to have to determine who the money should go to, depending on your family situation, this could cause a lot of problems and delays.

ALWAYS Name a Contingent Beneficiary 

contingent beneficiary is a safety feature and a control device. It is the most practical way to control the future distribution of wealth. It’s a simple thing today, but not something that should be decided on lightly. You should spend a lot of time determining who your beneficiary should be.

It’s also something that you should continue to maintain. There are dozens of different life changes that could impact who you would want to name as your beneficiary, which means that once you’ve named the primary beneficiary, it could change years down the road. Don’t forget to look back at your policy and ensure that the beneficiary is still the valid recipient and the best choice for the policy payout.

Life insurance is the most important investment that you’ll ever make for your family and loved ones. You may ask yourself at what age should I get life insurance policy, of course, we recommend the younger the better because the more you age the more risk you are to having health problems, which will increase your premium rates. Purchasing life insurance at age 20 versus purchasing life insurance over the age of 50. Tomorrow is not the day to start your life insurance application.  Begin the process today!

Contingent Beneficiary Review

Time for the pop quiz! Hopefully, you know exactly what a contingent beneficiary is at this point. Not only should you know what it is, but hopefully you understand why YOU should name one.

If you want to learn more about life insurance or naming a contingent beneficiary, we researched and wrote about the process of getting life insurance. We are ready to answer those questions and ensure that you’ve got the best life insurance to fit your needs.

The post What Is A Contingent Beneficiary? appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

ByCurtis Watts

Per Stirpes vs. Per Capita in Estate Planning

Three generations of one familyWhen creating an estate plan, one of the most basic documents you may wish to include is a will. If you have a more complicated estate, you might also need to have a trust in place. Both a will and a trust can specify how you want assets distributed among your beneficiaries. When making those decisions, it’s important to distinguish between per stirpes and per capita distributions. These are two terms you’re likely to come across when shaping your estate plan. Here’s a closer look at what per stirpes vs. per capita means.

Per Stirpes, Explained

If you’ve never heard the term per stirpes before, it’s a Latin phrase that translates to “by branch” or “by class.” When this term is applied to estate planning, it refers to the equal distribution of assets among the different branches of a family and their surviving descendants.

A per stirpes designation allows the descendants of a beneficiary to keep inherited assets within that branch of their family, even if the original beneficiary passes away. Those assets would be equally divided between the survivors.

Here’s an example of how per stirpes distributions work for estate planning. Say that you draft a will in which you designate your adult son and daughter as beneficiaries. You opt to leave your estate to them, per stirpes.

If you pass away before both of your children, then they could each claim a half share of your estate under the terms of your will. Now, assume that each of your children has two children of their own and your son passes away before you do. In that scenario, your daughter would still inherit a half share of the estate. But your son’s children would split his half of your estate, inheriting a quarter share each.

Per stirpes distributions essentially create a trickle-down effect, in which assets can be passed on to future generations if a primary beneficiary passes away. A general rule of thumb is that the flow of assets down occurs through direct descendants, rather than spouses. So, if your son were married, his children would be eligible to inherit his share of your estate, not his wife.

Per Capita, Explained

Older couple signs a will

Per capita is also a Latin term which means “by head.” When you use a per capita distribution method for estate planning, any assets you have would pass equally to the beneficiaries are still living at the time you pass away. If you’re writing a will or trust as part of your estate plan, that could include the specific beneficiaries you name as well as their descendants.

So again, say that you have a son and a daughter who each have two children. These are the only beneficiaries you plan to include in your will. Under a per capita distribution, instead of your son and daughter receiving a half share of your estate, they and your four grandchildren would each receive a one-sixth share of your assets. Those share portions would adjust accordingly if one of your children or grandchildren were to pass away before you.

Per Stirpes vs. Per Capita: Which Is Better?

Whether it makes sense to use a per stirpes or per capita distribution in your estate plan can depend largely on how you want your assets to be distributed after you’re gone. It helps to consider the pros and cons of each option.

Per Stirpes Pros:

  • Allows you to keep asset distributions within the same branch of the family
  • Eliminates the need to amend or update wills and trusts when a child is born to one of your beneficiaries or a beneficiary passes away
  • Can help to minimize the potential for infighting among beneficiaries since asset distribution takes a linear approach

Per Stirpes Cons:

  • It’s possible an unwanted person could take control of your assets (i.e., the spouse of one of your children if he or she is managing assets on behalf of a minor child)

Per Capita Pros:

  • You can specify exactly who you want to name as beneficiaries and receive part of your estate
  • Assets are distributed equally among beneficiaries, based on the value of your estate at the time you pass away
  • You can use this designation to pass on assets outside of a will, such as a 401(k) or IRA

Per Capita Cons:

  • Per capita distributions could trigger generation-skipping tax for grandchildren or other descendants who inherit part of your estate

Deciding whether it makes more sense to go with per stirpes vs. per capita distributions can ultimately depend on your personal preferences. Per stirpes distribution is typically used in family settings when you want to ensure that individual branches of the family will benefit from your estate. On the other hand, per capita distribution gives you control over which individuals or group of individuals are included as beneficiaries.

Review Beneficiary Designations Periodically

Multi-generational family

If you have a will and/or a trust, you may have named your beneficiaries. But it’s possible that you may want to change those designations at some point. If you named your son and his wife in your will, for example, but they’ve since gotten divorced you may want to update the will with a codicil to exclude his ex-wife. It’s also helpful to check the beneficiary designations on retirement accounts, investment accounts and life insurance policies after a major life change.

For example, if you get divorced then you may not want your spouse to be the beneficiary of your retirement accounts. Or if they pass away before you, you may want to update your beneficiary designations to your children or grandchildren.

The Bottom Line

Per stirpes and per capita distribution rules can help you decide what happens to your assets after you pass away. But they both work very differently. Understanding the implications of each one for your beneficiaries, including how they may be affected from a tax perspective, can help you decide which course to take.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to get started with estate planning and what per stirpes vs. per capita distributions might mean for your heirs. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect, within minutes, with a professional advisor in your local area. If you’re ready, get started now.
  • While it’s always a good idea to consult with a financial advisor about estate planning, you can take a do-it-yourself approach to writing a will by doing it online. Here’s what you need to know about digital DIY will writing.

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The post Per Stirpes vs. Per Capita in Estate Planning appeared first on SmartAsset Blog.

Source: smartasset.com