4 Mistakes People Make When Buying and Using Life Insurance

Here are some of the most common mistakes to avoid when buying a life insurance policy. 

All life insurance policies are held in a person’s name.

Federal and/or state estate taxes may apply to an individual’s estate upon death if their gross estate is sufficiently significant. The life insurance proceeds of a policy in which the person is the outright policy owner are included in the person’s gross estate.

You might want to think about having a trust or an adult beneficiary buy, own, and be the recipient of the life insurance proceeds on the individual’s life to avoid any inclusion of life insurance proceeds in one’s estate.

According to current tax legislation, a life insurance policy cannot be included in a person’s gross estate if they neither own it nor have any rights to it. This is true even if the person gives a trustee or an adult child cash gifts that are used to cover the cost of the life insurance premiums.

Federal employees who are covered by the Federal Employees Group Life Insurance (FEGLI) program are unaware of the rising cost of the insurance.

Many federal employees who have signed up for the FEGLI program are unaware of the premiums they are paying. They don’t examine the premiums they are paying by looking at their biweekly leave and salary statements.

They might not be aware of the rising cost of the FEGLI optional coverage if they are enrolled in Option A ($10,000 Standard), Option B ($Multiple of Salary), and Option C ($Family Coverage). This is especially true once the employee reaches the age of 55.

If a retiring employee is eligible and chooses to keep the full amount of “Basic Insurance” after retiring from federal service, the premium for that “Basic Insurance” will increase by 700-800%. This may not be known to the retiring employee if they are enrolled in the FEGLI “Basic Insurance,” which is equal to their current SF 50 salary adjusted.

Forgetting that term insurance, even group term insurance, has a finite amount of coverage and skyrockets in cost.

When purchasing life insurance, many tend to equate “low money outlay” with “inexpensive.” “Low dollar outlay” refers to a quantifiable difference between the amount of the premiums needed to acquire one type of life insurance policy and the amount required to own another.

For instance, term life insurance will always cost less than a whole life insurance policy for the same amount of death benefit. The definition of “inexpensive” calls for people to evaluate the results of their modest financial investments.

The following question should be asked by everyone looking to get life insurance: “What kind of policy-term or permanent-and for how long (10 years, 20 years, 30 years, or a lifetime) will I need to have the policy to achieve my financial goals and objectives?”

No matter how “cheap the money outlay,” a life insurance policy is the most “expensive” if the policy owner never achieves their financial goals and aspirations.

Substituting an individual life insurance policy for a survivor annuity, such as a CSRS or FERS survivor annuity, as a supplement or replacement.

“Pension maximization” is the name given to this substitute. After leaving the federal government, a federal employee will receive a lifetime pension in the form of a CSRS annuity (for CSRS and CSRS Offset personnel) or a FERS annuity (for FERS employees).

When an employee retires, they can give a survivor annuity to one individual, most commonly a spouse, who will then receive a lifetime income in the form of a CSRS or FERS survivor annuity upon the retiree’s passing. The retiring employee will have to accept a lower gross annuity to do this.

The starting gross CSRS or FERS annuity of the retiring employee may be reduced by as much as 10%. Even when the CSRS or FERS annuity receives cost-of-living adjustments, the reduction stays the same amount. The surviving spouse is entitled to receive up to 50% of the deceased retiree’s gross annuity for the balance of the surviving spouse’s life after the retiree’s passing.

The premise behind pension maximization is that a retiring employee chooses to offer themselves a “life only” annuity, payable solely to the retiree. At the same time, they are alive rather than electing to give a survivor annuity. This maximizes the retiree’s CSRS or FERS lifetime annuity by reducing the cost of providing a surviving annuity payout.

The retiree purchases a life insurance policy on themselves with their spouse as the only beneficiary to safeguard the spouse. Upon the retiree’s death, the life insurance proceeds, once distributed, may provide the surviving spouse with additional income.

Contact Information:
Email: rick@andrikfinancial.com
Phone: 9568933225

Bio:
Rick Viader is a Federal Retirement Consultant that uses proven strategies to help federal employees achieve their financial goals and make sure they receive all the benefits they worked so hard to achieve.

In helping federal employees, Rick has seen the need to offer retirement plan coaching where Human Resources departments either could not or were not able to assist. For almost 14 years, Rick has specialized in using federal government benefits and retirement systems to maximize retirement incomes.

His goals are to guide federal employees to achieve their financial goals while maximizing their retirement incomes.

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