For many people, buying life insurance is a way to secure the financial future of their loved ones. On top of having a will, it feels like an extra level of certainty that those you love will be looked after when you die. But the reality of a life insurance policy is not always plain sailing when it comes to making a claim. Here are the things you should know.
More than half of Americans have a life insurance policy, according for the not-for-profit organization LIMRA. Research from LIMRA also shows that the Covid-19 pandemic has made more people consider taking out life insurance, with 45% of millennials now saying they are likely to buy life insurance since the pandemic started.
In essence, life insurance is an agreement between an individual and their chosen life insurance provider, offering financial protection to named beneficiaries on the policy when they die.
Life insurance can make families feel supported and less anxious when thinking about what would happen if someone passed away. Yet issues can also arise when someone goes on to make a life insurance claim in reality. Payments can be delayed, denied or disputed for many reasons, and sometimes a life insurance attorney is needed to rectify these issues (more info here).
Here are some of the things to think about if you have a life insurance policy, to ensure there are no problems when your beneficiaries need to make a claim.
Name an Individual and Additional Individuals
It is important to name at least one individual as the beneficiary of your life insurance, as well as further beneficiaries as a back-up plan. This is in case the first named beneficiary also dies before the claim can be made. You can also name multiple beneficiaries to gain equal shares of the life insurance claim. However, it is extremely important to make sure you name an individual and some further individuals in your policy. This is because if there are no named beneficiaries for the claim to go to when you die, the money will be directed towards your estate instead. This will add onto the inheritance tax payable on your estate, which will mean more money than necessary will be paid to the tax man.
Check Your Policy Annually
Many people take out a life insurance policy and then see it as a job that is done and dusted forever. In fact, you should make sure you check your policy on a regular basis, to ensure nothing has changed in your circumstances that you want to reflect in the policy. You’d be surprised how much changes in your life that you don’t think to reflect in your policy. A classic example is when a couple gets divorced, and the policyholder would no longer want to name their ex-spouse as a beneficiary. Unless you change this explicitly in your policy, your former partner can legally claim your life insurance money if they are a named beneficiary. Some people also take out their life insurance policies before they have children, and then forget to add their children as beneficiaries.
Get Enough Coverage
Some people find a great deal on a life insurance policy, and subsequently take it out before checking all the details. Sometimes the value of a life insurance policy can sound like a lot of money, so you take out the policy without crunching the numbers. If you genuinely want to ensure your loved ones can cope financially with the help of your policy, you need to do some realistic calculations to find out how much they will need. Include things like the cost of a mortgage, bills and any loans, as well as reasonable costs for raising any children until they reach adulthood. Life insurance is to ensure your loved ones can maintain a certain quality of life if you die, so ensure your policy provides the right coverage for this.
Name Adult Beneficiaries
It is common for life insurance policy holders to name their children and/or grandchildren as the beneficiaries. This is fine if the children or grandchildren are adults, but if they are minors when a claim is made, state laws may prohibit them from gaining access to the money until they are adults. In essence, this is because the legal system typically stops minors from receiving large sums of money, as they are not mature enough to handle the responsibility of large sums. In this instance, extra expense might be created for minors to be able to access the money.
Often, setting up a trust for your life insurance to be paid into is a better solution, as more flexibility can be built into how beneficiaries can access this. If you would prefer your beneficiaries to receive the money directly from your policy, you could review your life insurance policy as soon as your beneficiaries become adults.