Linas Sudzius, with Advanced Underwriting Consultants, has seen many problems generated form improper, inadequate or outdated beneficiary designations. Please read his article below which addresses some common beneficiary errors. It is a good reminder for all of us to remind our agents to think about proper beneficiaries at policy issue and the importance of beneficiary review during regularly scheduled policy review meetings:

Mistakes in Beneficiary Designation

The single biggest category of life insurance mistakes is with in the realm beneficiary designations. While the beneficiary errors discussion centers around life insurance, each of the beneficiary designation observations could also apply to some extent to pension accounts, IRAs or non-qualified annuities.

Mistake One: The Insured’s Estate Has Been Named Beneficiary

Very few life insurance applications explicitly name “estate of the insured” the beneficiary of the death benefit. However, most life insurance companies default to the insured’s estate when no specific beneficiary is listed.

What’s wrong with naming the estate the beneficiary—either explicitly or by default?

If the estate is the beneficiary, the access of the heirs to any money associated with the financial product is delayed because the money must go through probate. With probate, in some cases, the delay can be a year or more. Any asset forced through the probate process becomes part of the public record, so privacy is lost. Perhaps most importantly, in most jurisdictions the life insurance money becomes subject to the claims of creditors of the decedent’s estate—a situation that does not exist where there is a named beneficiary.

If the decedent has no valid will at the time of death, the intestate rules of the state of residence at the time of death will dictate who will be entitled to the death benefits. Will the state’s default provisions match the decedent’s intentions? In many cases, the answer will be no.
Finally, in some states, Ohio for example, failing to name a specific beneficiary for a life policy may cause the benefits to be subject to state estate tax. In Ohio, that may mean up to 7% of the death benefit could be lost unnecessarily.

Mistake 2: The Policy Has No Named Contingent Beneficiaries

A substantial percentage of life insurance applications have had no named contingent beneficiary or beneficiaries.

Why is that a problem?

If there’s no named contingent beneficiary, and if the primary beneficiary has predeceased the insured, in most cases the insured’s estate will be the default beneficiary. That leads to all the drawbacks described in mistake number one.

It’s a best practice to always name contingent beneficiaries. Some more sophisticated producers even go so far as to name a second set of contingent beneficiaries, in case both the primary and contingent beneficiaries have pre-deceased the insured.

Mistake Three: Minors or Other Impaired Persons Have Been Named Beneficiaries

Say that Tom and Katie, a married couple, each want to buy insurance on their lives. Tom will own the coverage on his life, naming Katie the beneficiary. Katie will own insurance on her life, naming Tom the beneficiary. Each of them names their daughter Suri as the contingent beneficiary.

Assume that Suri is only five years old. If something happens to both Tom and Katie in the next few years, and Suri is entitled to the money, she will not be old enough to exercise legal control over it. In most cases, a court-supervised guardianship or conservatorship will need to be created for the benefit of the minor.

The process of creating a guardianship or conservatorship usually requires a legally responsible adult to file a petition with the court to seek permission to act. If family members are not in agreement with regard to who should act, the court proceeding could be contested. The cost of a family fight could deplete assets otherwise available for the minor.

Once selected by the judge, the guardian or conservator will have numerous duties and responsibilities with regard to taking care of all of the minor’s needs. The fiduciary will likely have to seek the court’s prior approval for many actions, increasing costs and creating delays.

What’s the alternative?

If Tom and Katie have created a testamentary trust for Suri’s benefit inside of their will or living trust documents, then that trust may be named contingent beneficiary of the life proceeds. If no such trust has been created, the parents may decide to let Jack, a close family friend, hold the money on Suri’s behalf, using a ready-made custodianship under the Uniform Transfers to Minors Act (UTMA).

In the example, even if Suri is 25 instead of five, it might be a mistake to leave her a substantial life insurance death benefit. It is clearly imprudent to pay a lump sum of almost any amount to a spendthrift child, even if that child is technically an adult. Further, even if a beneficiary is not a spendthrift, it may be wise to force large sums of money to be managed by a professional on the beneficiary’s behalf. That’s where a trust as beneficiary might also be helpful.

When a potential beneficiary is collecting needs-based government benefits, if that beneficiary collects funds from a life insurance policy it may make those benefits stop. The best course might be to leave funds to a special needs testamentary trust for the benefit of that beneficiary. Such a trust, properly drafted and administered, can give the beneficiary some access to funds while also allowing benefits to continue.

How can an insurance professional tell whether a client has minors named as beneficiaries, or whether the beneficiaries are financially impaired? Ask the client!

Mistake Four: The Beneficiary Language is Wrong or Unclear

Let’s say that Ann Romano names her adult daughters, Barbara and Julie, each 50% beneficiaries of Ann’s life insurance policy. Where will the policy proceeds go if Barbara passes before Ann, then Ann dies before making any adjustment to the beneficiary designation?

Many insurance companies will send the death proceeds to the sole surviving beneficiary—in this case it would be Julie. But is that what Ann would have intended? What if Barbara left two children—Ann’s grandchildren—as survivors? If Julie is the unintentional sole beneficiary, Barbara’s children would be excluded from sharing in the death benefit.

In a case like this one, where fractional parts of the death benefit are earmarked for different beneficiaries, a financial professional should seek clear direction from her client regarding distribution intentions if one of the beneficiaries are pre-deceased.

If Ann, in the example, wanted her daughters to be equal beneficiaries, but wanted a pre-deceased beneficiary’s children to get their parent’s share, the beneficiary designation might read like this:

One fifty percent (50%) share to my daughter Julie Cooper, and one fifty percent (50%) share to my daughter Barbara Cooper. If one or more of these beneficiaries shall pre-decease me, the amount designated shall be distributed per stirpes to the pre-deceased beneficiary’s living issue, if any, otherwise surviving beneficiary(s) shall share in the same proportions.

Genworth announced yesterday the suspension of life and annuity sales. This was announced in a communication from David O’Leary:

Subsequent to Genworth’s 4th quarter earnings release on February 4th. A formal communication plan from Genworth has commenced which we will share as it is received including business transition rules.

Read all the details here

While most individuals understand their general need for life insurance, typically, not many people know much about it. Because of this, Forbes put together a simple list of 10 things your clients need to know about life insurance. Read the article and help your clients learn which life insurance products could best benefit their families.

10 Things You Absolutely Need To Know About Life Insurance

by Tim Maurer

Life insurance is one of the pillars of personal finance, deserving of consideration by every household. I’d even go so far as to say it’s vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance.

Perhaps this is due to life insurance’s complexity, the posture of those who sell it or merely our preference for avoiding the topic of our own demise. But armed with the proper information, you can simplify the decision-making process and arrive at the right choice for you and your family.Life insurance

To help, here are 10 things you absolutely need to know about life insurance:

  1. If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone’s ex-spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to be no more, then you don’t need life insurance. You may, however, consider using life insurance as a strategic financial tool.
  2. Life insurance does not simply apply a monetary value to someone’s life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. Strategically, it helps those left behind cover the costs of final expenses, outstanding debts and mortgages, planned educational expenses and lost income. But most importantly, in the aftermath of an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one. In addition, life insurance can provide valuable peace of mind for the policy holder. That is why life insurance is vital for the bread winner of a single-income household, but still important for a stay-at-home spouse.
  3. Life insurance is a contract(called a policy). A policy is a contract between a life insurance company and someone (or occasionally something, like a trust) who has a financial interest in the life and livelihood of someone else. The insurance company pools the premiums of policyholders and pays out claims—called a death benefit—in the event of a death. The difference between the premiums taken in and the claims paid out is the insurance company’s profit.
  4. There are four primary players, or roles, in a life insurance policy. These roles belong to the insurer, the owner, the insured and the beneficiary. The insurer is the insurance company, responsible for paying out claims in the case of a death. The owner of the policy is responsible for premium payments to the insurance company. The insured is the person upon whose life the policy is based. The beneficiaryis the person, trust or other entity due to receive the life insurance claim—or death benefit—in the case of the insured’s passing. For example, I am both the owner and the insured for two life insurance policies (with two different insurers, as it happens). My wife is the beneficiary of each. We walk through the numbers together at least annually (and after major arguments, to prove that I’m still worth more alive!).
  5. Life insurance is a risk management tool, not an investment. While some life insurance policies have an investment feature that can offer a degree of tax privilege, insurance is rarely an optimal investment. There’s usually a better, more efficient tool for the financial task you’re trying to accomplish. If you haven’t yet filled up your emergency cash reserves, paid off all non-mortgage debt, maxed out your 401(k) or Roth IRA, contributed to an education savings plan (where appropriate) and set money aside for large purchases you expect in the next decade, then you likely need not concern yourself with types of life insurance that contain an investment component. (You’ll see why in #7.)
  6. There are two broad varieties of life insurance about which you should become aware—term and permanent. Term life is the simplest, the least expensive and the most widely applicable. With term life, a life insurance company bases the policy premium on the probability that the insured will die within a stated term—typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, after which the policy becomes cost-prohibitive to maintain or you decide to let it lapse. Yes, this means that you may very well pay premiums for decades and “get nothing out of it.” But that’s good news, because it means you’re winning at the game of life.
  7. Permanent life insurance includes this same probability-of-death calculus, but also includes a savings mechanism. This mechanism, which is often referred to as “cash value,” is designed to help the policy exist into perpetuity. Whole life—the original—has an investment component much like bonds or CDs (but backed by the insurance company). Variable life offers investment options more like mutual funds. Universal life was designed as a less expensive permanent life insurance alternative with added flexibility, but increased interest rate risk for the owner. Although they tend to be more complex and expensive, there are financial dilemmas—often related to business planning and/or high-net-worth estate planning—for which permanent life insurance may be the only solution. There are a few select instances where permanent policies are engineered to maximize the tax-privileged growth of cash value. They are, however, only appropriate for a small number of people and still dependent on numerous other factors to work the way they’re intended.
  8. Determining the optimal life insurance policy for you doesn’t have to be complicated. While we could get really granular with a detailed life insurance needs analysis, it’s more important to get set up with something you can comprehend than it is to push off an important decision due to life insurance’s intimidating complexity. In the vast majority of situations, a household would be well cared for simply by buying enough life insurance to replicate all or most of the insured’s income for a term as long as the household expects to need that income. Therefore, consider this simple but effective strategy for determining how much life insurance your household needs. Multiply a wage earner’s income by 15 and purchase a policy with an equivalent death benefit for a term that extends until the person insured would presumably retire. Why 15? Because it works. But it works because it results in a number that should re-create 75% of a wage earner’s income if the death benefit was conservatively invested to earn 5% (hopefully plus a bit more for inflation) annually. Here’s an example:
    • Dave makes $100,000.
    • $100,000 x 15 = $1,500,000 of death benefit
    • $1,500,000 earning 5% annually produces $75,000 of income.
  9. Consider using a live person to help in your death planning. There are many online tools that can help give you an idea of how much money you should pay for the policy you need. But once you get to that point, I would recommend contacting a real, live insurance agent who can walk you through the application and underwriting process. The premiums at a given insurance company are identical whether you apply online, via a toll-free number or with a person. Indeed, a knowledgeable and dedicated insurance broker or agent may help you save money by choosing the best carrier for your particular situation. Underwriting, by the way, is the necessarily tedious process through which the insurance company classifies how much of a risk you are, based on your current health, past health, the health of your parents and siblings and enough other questions to make anyone blush. Answer truthfully—but succinctly.
  10. Know your options when cancelling an existing life insurance policy so you don’t leave money, or coverage, on the table. If you have a policy that isn’t appropriate for you—or you simply no longer need it—it’s important to proceed carefully. First, if you realize that you have overpaid for a policy that doesn’t meet your needs, but you still need life insurance, don’t cancel the wrong policy until the right policy is in place. Who knows, you could learn of a health complication that is going to lead to you being declined for the new policy. Then you’d be left without any coverage. If you have an existing term policy you no longer need, you can simply cease premium payments and it will go away. If you have an unnecessary permanent policy with a cash value, however, you should analyze its present and expected future investment value, as well as any prospective tax complications, before cashing it in. You can do so by requesting an “in-force illustration” and a “cost basis report” from your agent.

I suspect we don’t love talking about life insurance because we don’t like talking about death. No shocker there. But open and honest discussions about planning for an unexpected death can be surprisingly life-giving. And even if you don’t buy that, the chances are good that purchasing life insurance is still an important part of your long-term and comprehensive financial plan.

As of January 1st, 2016 Mutual of Omaha’s (MOO) GRO (Garaunteed Return Option) rider will have four additional 100% refund windows for your clients to receive all of their money back. These windows are at policy years 21, 22, 23 and 24. These additional windows will now provide your client with six opportunities to get all of their premiums paid back, from years 20 through 25. MOO will continue to have the year 15 window at 50% as well. The result will be an enhanced GRO rider with the following liquidity windows:

  • Year 15: 50% refund of premiums paid*
  • Years 20, 21, 22, 23, 24, 25: 100% refund of premiums paid*

The GRO rider is provided on policies at no additional cost and will be included on policies as long as the guaranteed death benefit runs to age 100**

The enhanced GRO rider along with the enhanced Chronic and Terminal Illness riders provide protection for your clients for a wide range of contingencies; premature death, chronic illness expenses, terminal illness expenses, insurance needs changes and retirement income needs which can all be addressed with one simple product.

Please be aware that the changes on 1/1/16 will be accompanied by a minimal price correction (0-3%) which will have little to no impact on our pricing position***

Transition rules:
GUL and GUL Plus applications signed on or after January 1, 2016 will receive the new rates and the enhanced GRO rider. For applications dated prior to January 1, 2016 and received by Mutual of Omaha prior to January 30, 2016 the old pricing and GRO rider will apply however, the client can choose to have the new GRO rider and pricing by contacting underwriting.

*Subject to a 35% of Death Benefit restriction
**The rider will be included as a general rule when you guarantee the death benefit to age 100, but sometimes this varies. Please always make sure that the GRO rider is showing up on the illustration.
*** Pricing will be higher in New York

Money, think security, strength and happiness…

Money, think about it. A recent study, published in the Harvard Business Review, found that people who think about money are less likely to feel left out by their peers. The study looked at individuals who felt ostracized at work and found that “…situational reminders or simple thoughts of money can provide a sense of strength, making people feel able to withstand difficulties.”

money-mantra-background_fkcSL2wOThinking about the Harvard study in terms of life insurance, it would seem that individuals who own life insurance must also feel stronger, better able to overcome difficulties, and more socially welcome.

While the study looked at people who felt left out at work, it may also be applied to other feelings of safety and adequacy. the study stated, “From a survival point of view, money provides greater control over one’s physical and social circumstances

While money may talk, life insurance yells. Even though it’s good for today, money won’t provide you strength when you’re gone. Life insurance, on the other hand will. It not only provides security, strength and happiness for you personally, it also provides it for your beneficiaries.