How To Avoid Life Insurance Mistakes.

The larger the worth of your property be it your estate or business holdings the more chances of increasing the complexities of your Life insurance. While some choose their life policies with ease some get confused with the complexities and tend to make mistakes. Find out more about which mistakes to avoid.

Life Insurance Errors…
Let's say beneficiaries of life insurance proceeds are freed of income tax which in turn could be subject to estate tax.

Fail to change ownership properly: you could exclude life insurance proceeds from your estate and avoid the estate taxes by changing the owner of the policy. So you could be the insured and make your adult child the owner and beneficiary of the policy. You could also transfer ownership of a policy to an irrevocable life insurance trust. Be careful of traps while you transfer ownership of the policy to the trust or your child, and you die within three years of the transfer, the proceeds are included in your estate.

You can avoid that by having the child or trust buy the policy on your life. However, if you're not in good health and the insurance company won't sell you a policy, you're out of luck. No matter which way you transfer ownership, you may have to deal with gift tax issues if you give money to the trust or your child to pay the premiums and they're more than $10,000 per year.

The main thing is to remember to change the ownership and the beneficiary of the insurance policy. An insured person had transferred ownership of a $1 million policy to a life insurance trust but failed to make the trust the beneficiary (he also died within three years of the transfer). The mistake cost the insured's heirs $450,000 in estate taxes that might have gone to them if things had been handled properly.

Misunderstand Beneficiary Implications
Simply having someone else own the policy can still cause problems. A common mistake is to name one other half as the owner of the policy on the life of the other spouse, and then name the child (or life insurance trust) as beneficiary. When the insured person dies and the proceeds pass to the child or trust, the surviving spouse is deemed to have made a gift of the full value of the proceeds, minus the $10,000 annual gift-tax exclusion if no other gifts were made in that year. That's a steep gift tax on a $500,000 or $1 million policy. Have the child or trust be both owner and beneficiary.

Instruct the life insurance trust: An irrevocable life insurance trust document that requires the trustee to use the life insurance proceeds to pay the estate taxes of the insured could bring the proceeds back into the estate and subject them to federal estate taxes. Don't issue such instructions.

Make Improper Exchanges
Increasingly popular are second-to-die life policies. These policies pay upon the death of the surviving spouse, and their premiums are substantially less than separate policies for the same total amount. However, exchanges of a couple's separate life policies for a joint second-to-die policy don't qualify for tax-free exchanges, and any gains that have accrued in the original policies become taxable income.

Make sure the following mistakes are not part of your application: no contingent beneficiary, naming a minor as a direct beneficiary and misstating the date of birth of the insured. Also be sure your insurance agent understands the complexity of ownership and beneficiary rules.