Life Insurance Mistakes

John Stillman: Hello and welcome to another edition of Wright Money Tips with Isaac Wright, chartered financial consultant and the president of Financial Dynamics and Associates. I'm John Stillman, alongside Isaac, who's also the author of Navigate Your Way To A Secure Retirement. Isaac, man, how are you? Good to talk with you.

Isaac Wright: Hey John, I'm doing good. Getting close to the end of the year here. And yeah, the podcast has been really successful this year, man. I've really had a lot of people say good things about us. Hard to believe we've already been at it for a year.

John Stillman: Time to get some sponsors on here then. Need to start pitching Casper mattresses or Blue Apron, one of those classic podcast advertisers. We'll work on that.

John Stillman: Well, today's topic, on its face seems like it would be very boring. We're talking about mistakes that people make with life insurance, okay?

Isaac Wright: Okay.

John Stillman: I know life insurance has sort of a connotation that maybe is not ... you know, life insurance salesman particularly, have a connotation that's maybe not so flattering as evidenced in this clip from Groundhog Day.

Ned Ryerson: Phil Connors? Phil Connors, I thought that was you.

Phil Connors: Hi, how are you doing? Thanks for watching.

Ned Ryerson: Hey, hey, now don't you tell me you don't remember me because I sure as heck fire remember you.

Phil Connors: Not a chance.

Ned Ryerson: Ned Roberson, Needle Nose-Ned, Ned the head. Come on buddy. Case Western High, Ned Roberson. I did the whistling belly button trick at the high school talent show. Bing! Ned Roberson got the shingles real bad senior year. Almost didn't graduate. Bing! I ... Ned Roberson, I dated your sister Mary Pat a couple of times until you told me not to anymore. Well?

Phil Connors: Ned Roberson?

Ned Ryerson: Bing!

Phil Connors: Bing. So, did you turn pro with that belly button thing Ned?

Ned Ryerson: No Phil, I sell insurance.

Phil Connors: What a shock?

Ned Ryerson: Do you have life insurance? Because if you do, you could always use a little more. Am I right or am I right or am I right?

John Stillman: Am I right or am I right or am I right?

Isaac Wright: Oh God, that's great.

John Stillman: So that's what a lot of people think about when they think of life insurance or life insurance salesman.

Isaac Wright: Sure.

John Stillman: However, it would be my assumption, Isaac, that most of your clients do have life insurance, right?

Isaac Wright: Yeah, they do. And get it in various ways.

John Stillman: So we're going to talk about the mistakes that people sometimes make, especially when it comes to making sure that that life insurance actually pays out. We can talk about insurance mistakes that you make in terms of getting the right policy, but what we're talking about here is, you've actually passed on. And the life insurance that you bought for a reason, well, that reason has now come into play and lo and behold, it's not going to pay out to your beneficiaries, to your loved ones.

Isaac Wright: Okay.

John Stillman: Because you did something wrong.

Isaac Wright: Got you.

John Stillman: So one of the things, and this seems pretty simple, but sometimes it happens for various reasons. Failure to make a premium payment or you just let your policy lapse accidentally.

Isaac Wright: Well, and a lot of times exactly right, it's an accident. People forget they get their payment. A lot of people pay their life insurance monthly through a systematic withdrawal. That way you don't forget. But sometimes you pay quarterly, semi-annual, annual, and it only takes ... I mean, you could have been paying the policy each and every year for 10, 15, 20 years, and you miss one payment. And even though you may get a reminder notice in the mail, "Hey, your payment's due."

Isaac Wright: If you forget that and you don't make that payment and that policy lapses, at the insurance company, once you get past that grace period, they're not on the hook for paying your claim potentially. And believe me, if they can get away from not paying a claim legitimately, I think they're going to wind up taking that option. So just please keep in mind, do not allow yourself to be in a position where your policy lapses by maybe setting up your payments systematically versus having to write a check and forgetting that check.

John Stillman: Yeah, well it could be though that the systematic approach is what ends up biting you, because maybe you have it on your credit card and you get a new card and you forget to update that particular auto draft. and maybe the notification ends up in your spam folder telling you that your card didn't go through. I mean, things like that can happen?

Isaac Wright: Yeah. Let me ... actually this is probably really great to share about me personally. So, I have a calendar on my computer that's a master calendar that gives me certain dates throughout the year of certain things that are due. So maybe keeping a plan B that way, may help you. Let's call it again, avoid a potential disastrous situation by not having an insurance policy pay out by just reminding you through another notice other than the insurance company itself.

John Stillman: So be careful. Don't let that policy lapse. Don't want to leave your loved ones in a bad state. I mean there's one thing if you were just irresponsible and didn't get life insurance in the first place, but if you took the time to get it, you did the responsible thing and now one tiny mistake keeps it from paying out. Well, we certainly want to avoid that. How about this? You don't tell your family or your loved ones about the life insurance policy in the first place.

Isaac Wright: I always think in a way, sometimes people don't want the person that's the beneficiary to know how much insurance that is on them. I don't know if that means you should have them as the beneficiary in the first place? If you don't trust them enough to disclose how much money they may get if you pass away.

Isaac Wright: But if you never tell your beneficiaries about your life insurance policy, it doesn't mean the insurer won't pay them. It just means it's more difficult because they may not be aware that you are a beneficiary on the policy or vice versa. And so a lot of times life insurance proceeds, if you're not in a position where the beneficiary is aware that you even had a policy, a lot of these policies really get in a fashion where they may be a years and years before they get paid out, if ever at all. And so it's almost really ... even though you may not necessarily want to disclose, and I always tell sometimes families that I work with this, let them know you have life insurance and that you're the beneficiary. You don't have to give them the amount.

John Stillman: Yeah.

John Stillman: You're going to get $1 million when I die.

Isaac Wright: Yeah, don't tell them.

John Stillman: Just by the way, here's where we keep the knives in the kitchen.

Isaac Wright: But at least they know that there is a policy that will allow them to have money. If you did a life insurance policy, it's obviously there probably for income replacement or being able to have a lump sum money to be able to take care of debts or a combination of both, so let them know. You don't have to tell them the amount if you're nervous about that, but please tell the people that you love that are the beneficiaries on the policy that you do have a policy that will be paid out to them if something happens to you and that's a big deal.

John Stillman: Let's think about this logically. I mean if you have a loved one, they're the beneficiary of your life insurance policy and they don't know you have it. I mean the life insurance policies don't just magically know that you've died. It's not like the company calls you every year to say, "Hey, are you still alive? Okay, just wanted to check to be sure you haven't died and we need to pay a policy out to someone."

John Stillman: If they don't know to ask. If they don't know to go to the life insurance company and say, "Hey, this person has died. I would like to file a death claim." Well, how is it ever going to get paid out if they don't ask? So they just need to know that it's there.

Isaac Wright: Correct.

John Stillman: All right. Another mistake that people make is not naming a contingent beneficiary. Now that sounds like a big fancy financial term, Isaac, but what's a contingent beneficiary and why might it be important?

Isaac Wright: Sure, so when you have a policy, in some respects, you may have put down your spouse as the beneficiary or maybe a child as the beneficiary. Even the child may be grown, but that may be the only beneficiary you've put down on that policy, which is your primary beneficiary. But if that primary beneficiary dies before you die, then those policy proceeds will go to the next or secondary or "contingent beneficiary" you have listed.

Isaac Wright: The problem is if you don't have a contingent beneficiary, the life insurance pretty much, for the most part, will go to your estate. And now the transfer of that insurance asset, let's call it, that money that would be paid out, could be a little bit more hassle in terms of being it paid out, the tying up of that money, possibly through probate, through your estate. Where most people in, let's call it, in the grand scheme of owning life insurance, one of the biggest benefits of life insurance is having that life insurance pay out directly to the beneficiary you name so it can bypass probate. It can bypass what I would call some of the things that may extenuate getting that money out of the policy and be paid directly. Once they have a death certificate, it gets paid out basically to the beneficiary you choose.

Isaac Wright: So A, make sure you choose the right beneficiaries and B, if you only have one beneficiary, please consider making a backup beneficiary because let's call it your spouse was the beneficiary. Your spouse passes away before you do. You may be in a grief mode where you just forget to update your beneficiaries. Next thing. You know that policy, even though you may continue to pay on the, it's not going to be paid out to possibly whom you would want that money to go to next. So please, contingent beneficiaries are equally, if not as more important as your primary.

John Stillman: I think that's a great point, the way you explained that. Because I feel like the way that contingent beneficiaries get explained a lot is, well let's say husband and wife are each other's beneficiaries. Well, let's say they die in a plane crash together. That's what people always say, right? Suppose they die in a plane crash together, we need a contingent beneficiary. But what you just said is much more realistic than people dying in a plane crash together. It's that your wife is the beneficiary, but she dies first and you forget to update it. That's really where the issue lies in the real world, not the two of you dying in a plane crash together, although that's certainly is one way to go.

Isaac Wright: Correct.

John Stillman: All right, last one, Isaac. Be careful of your hobbies and extracurricular activities. Why does it matter how you die?

Isaac Wright: Well, this is, yeah, people attribute life insurance in terms of things that they may disclose as far as their smoking, if they use tobacco, sometimes maybe disclosing a different height and weight that ultimately may be on the application. And all those things are normally fed through the process of owning life insurance, especially for higher life insurance amounts. You have to typically do a paramed, and they're going to flush out whether you smoke, they're going to flush out your height and weight, they're going to do a blood or urine to make sure that everything is good in terms of like maybe having high blood pressure too, they're going to still ... this paramed is going to kind of weed a lot of that out.

Isaac Wright: But you may independently have a cliff diving obsession. You may independently be a drag car racer and of course I'm being a little over the top here, but you may have significant hobbies that are very dangerous and really the insurance company may not know that. Nor would they ever know that unless you disclose it.

Isaac Wright: And so all of a sudden you have a life insurance policy. And a year later you pass away due to a drag racing accident or you put yourself in a place where due to your hobby, you die. The insurance company without you disclosing that has a really big leg to stand on that says, "Hey, we're not paying this out because you didn't disclose it at the time of your application." So you need to be very careful if you have a high risk hobby like sky diving, auto-racing, and if you die while doing that hobby, you are putting yourself in jeopardy of having that policy not pay out.

John Stillman: Certainly important things to know and as we said, life insurance, not necessarily the most exciting topic, but Hey, we got to listen to a clip from Groundhog Day. We got to talk about cliff diving so you never know where it's going to go here on Wright Money Tips.

John Stillman: If you have questions about anything related to your retirement planning, and that's really the main point of this discussion. We're talking about insurance mistakes, life insurance mistakes, which is one 10th of 1% of your overall retirement plan. This is a very small sliver of what you need to be thinking about. But it's one example of how just one tiny mistake along the way can really blow up your whole situation. So you want to be sure that you have somebody that's making sure all of the boxes are checked, that you're doing all the things you need to be doing and nothing's slipping through the cracks.

John Stillman: That's what the team at Financial Dynamics & Associates offers to you. Sort of the opportunity to be your personal CFO. If you'd like to get in touch with the team, call or text, whichever you prefer. The number's the same either way, 804-777-9999 is that number, 804-777-9999. You can also find more online at wrightmoneytips.com. Isaac, always a pleasure.

Isaac Wright: John, always a pleasure and we'll do it again soon.

John Stillman: We'll talk with you next time. Right here. Same time, same place on Wright Money Tips. Have a great day.

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