April 21st, 2020
I was sitting at my desk recently, going through some paperwork, when I noticed a simple mistake. It’s not all that uncommon for little details about submitting life insurance applications. So, I wanted to take a moment to tell you about a few common mistakes I see agents make when writing life insurance. Some are less intuitive than others, and so I think it’s worth a quick refreshment. This is obviously not a comprehensive list, but just a few I see from time to time, so if you have any questions or concerns feel free to reach out to me. But, without further ado…
Scott Gilpin
Life Marketing Manager
800.541.6705
1.) Check on Insurable Interest
It is the root of life insurance; if there isn’t a financial loss at the insured’s death, then chances are there is no insurable interest and underwriters are going to have a problem. I see this one more often than you would think. This one takes me back, to a long time ago, when I was training to get my insurance license. I kind of think of this as “Life Insurance 101”, where you have to ask yourself, “what financial loss will the beneficiary incur at the insured’s death?”
It seems to me that a lot of people think they can buy insurance and name whoever they want as the beneficiary. That isn’t the case. Of course, it can get a little complicated in certain situations, but it’s a question that an agent must ask when determining the justification and the structure of the case. If you’re working on something other than a vanilla husband and wife case, I’d encourage you to think about how the beneficiary stands to suffer a loss if the insured were to die. If you can think of how, you should be good.
2.) Know The Financial Justification
Similarly, this takes me back to when I was first training. The phrase that comes to my mind from that period is, “life insurance is designed to protect a person’s estate, not to create one.” Life insurance carriers must make sure that a person isn’t over-insured.
Therefore, every life insurance application includes an “other insurance” section, along with all the replacement questions. They must know how much insurance a person already has and what the total line of insurance they plan to have enforced. There are simple factors that the carriers will use to determine the justifiable amounts for personal and business insurance. Simply asking about these factors will help you know if your application is going to go through smoothly.
A person cannot simply purchase an amount of life insurance simply because they can afford the premium. They can certainly buy less than they are justified for, but you must be careful when they are asking for more. For the most part, it’s in cases involving insurance on children and business where I most often see face amounts higher than what is justified. I think it’s safe to say that most people are under-insured when it comes to their personal protection. Doing a thorough needs analysis and asking for the factors in determining to justifiable limits will help you make sure you are sending in a good piece of business.
This one is both simple and complicated. I am not engaged in the practice of law nor am I a certified tax expert, and therefore cannot give tax advice or counsel. However, I see this error being made frequently enough and I feel the need to remind my friends, colleagues, and clients. With that being said, this mistake comes when you have 3-different parties named as the Insured, Owner, and the Beneficiary for a life insurance policy. Take special care in this situation because it could create a taxable event upon death. A common structure I see when this occurs is where one spouse owns a policy on the life of the other spouse and the children/child is the beneficiary. At the insured’s death, the surviving spouse can be considered as having made a taxable gift of the proceeds to the children. If you want to make sure that life insurance proceeds are not taxable, please try to avoid having 3 parties to the contract. A general rule of thumb is that whenever the owner is different than the insured, that owner should also be the beneficiary. The same rule applies to business insurance as well. Always consult a certified tax expert if you run across this situation or if you have questions regarding the structure and/or tax implications of your life insurance case.