Insurance planning shouldn't begin until there's been some financial planning, according to CNBC in its article “3 life insurance mistakes you can easily avoid.” They cite three common mistakes that can be easily avoided or fixed:
- Not enough insurance. About 37% of parents with young children don't have sufficient life insurance, according to a 2015 report. Of those who do have insurance, 50% have less than $100,000 in coverage. Do a thorough analysis of your life insurance needs to be sure you’ve enough to cover funeral expenses, replace your income for the family and cover debts like the mortgage.
- Not reviewing your medical records. You should ask for a copy of your medical records from your primary care physician before applying for life insurance because the insurers will get those records, as well. They’ll look at your medical history to gauge risk and determine rates. There could be potentially costly mistakes in the record that should be fixed.
- Focusing on avoiding estate taxes. You may have your spouse own the life insurance policy on you so that you can be smart with your estate planning. Since you don't own the policy, it won't be included in your estate when you die. However, what’s known as "three-corner life insurance"—where the owner, insured and beneficiary are all different is to be avoided.
This three-corner configuration has the effect of transforming the policy proceeds into a gift from the policy owner to the beneficiary but anything above the annual $14,000 annual gift tax exclusion would be considered a taxable gift to the owner. That would decrease his or her annual lifetime exclusion.
Reference: CNBC (Sept. 16, 2016) “3 life insurance mistakes you can easily avoid”