Common Life Insurance Mistakes

This morning on BRN, common life insurance mistakes. Joining me now to discuss this and more, Phil Snyder is with The Warner Companies and full disclosure, he's also my dad. Dad, so great to see you. Thanks for joining us this morning. All right. Good to be with you, Jeff. Thanks for having me. Oh, it's always great to tap into your over 50 years of insurance and financial services experience. So we appreciate you coming on the program this morning. Right. Hey, look, you're a wealth of information. All right. We're going to talk about some common life insurance mistakes. Let's start with this one. Remembering or not remembering to review your life insurance policy regularly. So dad, why is this important? And what is the definition of regularly? Because regularly could be annually, it could be every five years, 10 years. So why is this important? Start with that. Well, it's important because circumstances change. Things in your family situation, your business situation, your overall financial situation may have changed since the time you purchased your insurance. And so consequently, it just makes sense as part of your overall review process to review your life insurance as well. And so does regularly mean time to a life event? So you get married, you get divorced, you have children, or does it mean annually, semi-annually, every five years? What is the rule of thumb there? Well, certainly if you have an event, birth of a child, purchase of a home, purchase or sale of a change in the tax law, things of that nature. Those are triggering events that would warrant reviews regardless of the kind of insurance you have. It just makes sense to review your policies as circumstances change. With respect to frequency, in any event, you would probably want to review your policy, if not annually, then certainly biannually, every two years, just to make sure that what you have is in fact what you think you have, and that it's functioning properly and reaching your expectations. So that's just good business sense. Yeah. I mean, that makes a lot of sense. And being aware of your events in your life, because we all go through porn, you go to school, all these kind of life events as we age. Dad, who does this? When you say review, do I, Jeff Snyder, just pick up my policy and start reviewing it? Or does my life insurance broker or my financial advisor, who does that on my behalf? Because there may be things in there that I don't really understand. Yeah. Well, I think the answer is all of the above. Certainly, you should at least be aware of what you have. And if you're unaware, life insurance is one of those items that you buy. Oftentimes, you didn't wish you had to buy, but you buy it nonetheless. You put it away, you don't look at it. It's out of sight, out of mind. You don't remember necessarily what you bought or the terms of the contract that you bought. And certainly, where available, you should include in that review, your life insurance broker and others who you look upon for financial advice and support. It's just logical, your lawyer, your CPA, your family member who you look to, your business owner for whom you work, whatever your source, all those people could potentially be included. Dad, next up, I want to ask you about the designation of a beneficiary. Again, this can change per our first topic. This can change why you want to always review your policy. But what happens if you designate an estate as a beneficiary? So the Jeff Snyder estate, the estate of Jeffrey Snyder, that may have some tax consequences and process consequences. So you want to know to whom you're designating as a beneficiary. Well, if you name your estate, two things happen. One, you leave open the insurance proceeds to the claims of creditors, right? Number one. And you subject those proceeds to probate costs. So there are some negatives to doing that. On the other hand, I have numerous clients who do designate their estate for other reasons. They just want the cash available, not necessarily targeted to anyone or any entity in particular. So circumstances dictate. But by and large, you want to name a beneficiary. You want to name a contingent beneficiary. And you want to be careful on one thing. If you're the insured and a second party, for example, a son, as an example, is a policy owner, you want to be careful not to name a third party as the beneficiary, because that would constitute a gift from the owner to the third party. And while that may not be meaningful with relatively small amounts of insurance and small estates, that could be very meaningful with big amounts of insurance and very large estates. So it's just something to be mindful of. And you would get counsel upon, you know, when you fill out the beneficiary information, I don't know if it's done online. When I did it, it was done by a paper because you need social and all that kind of stuff. But you would be advised, I'm assuming by your network of people, the CPA, the attorney, the life insurance broker who sold you, they would give you that sort of advice, wouldn't they? These are questions that need to be asked when the applications are filled out. And they're also questions that need to be addressed when you do these reviews, whether annually or otherwise. Yeah. Dad, I want to end on this mistake. I think we've got about two and a half, three minutes, but I think it's going to take that to get to this. And that's, we talked about cash value of a life insurance policy, typically a whole life or permanent type of life insurance. If you take money from a cash value, from the cash value portion of your life insurance policy, that could reduce ultimately the death benefit. Well, it does, typically. If you withdraw money or you borrow money from your policy, it reduces the death benefit of the policy on a dollar for dollar basis. If you have a $500,000 policy with $100,000 of cash and you withdraw 50 of the 100, the death benefit is going to be 450. Just as simple as that. Now, how do I gain access? If I have cash value, can I take that out at any time? Can I just call up insurance company ABC and say, I've got a cash value of $100,000 and I want 50 of it? Can I do that? Well, if you're the owner of the policy, you can do that. So let's make the assumption, again, use my example, $500,000 policy, I own the policy, has $100,000 of cash, I can call the insurance company and request funds from the policy, whether it's a withdrawal, whether it's a loan, whatever form it takes, I can do that as the policy owner. The caveat I would make is to the extent that you withdraw money from a policy, be it the loan or otherwise, to the extent it increases your basis, it's in excess of your basis, that is the cost of the policy and your cash value exceeds that, you have to be careful of the incidents of taxation when they gain. And there are ways around that. That's not an insurmountable hurdle by any means, but you just have to be mindful of these things. And that's where professional guidance is really helpful. And just to be clear, taking this cash value out isn't like in your 401k plan when you take a 401k loan and you have to pay it back. So you're not making repayments back into the life insurance policy. Although I guess you could, could you reinstate money that you took out back into the policy? Through a loan, you can, yes. So if I borrow $50,000 of my $100,000, I can repay the loan. Got it. So you can either do a withdrawal of the cash value or you can do a loan. That's correct. And there are reasons that would dictate which of the two or both of which you might do at any point in time. Interesting. Really interesting. Well, dad, we're going to have to leave it there. Look, these are, you know, these, these are really important questions and things. I'm 52 and I honestly, dad, I didn't know some of the answers to this, but what I do know is that you need to speak to a professional who does have all the information and meet with multiple people to get the answer. Dad, we're going to leave it there. Great to see you. Thanks for joining us. And we look forward to having you back on the program again, very soon. Enjoy your day. My pleasure. Talk to you soon. Bye. Don't forget to subscribe to our daily newsletter, The Morning Pulse for all the news in one place. Details are at our website. Until tomorrow, I'm Jeff Snyder. Stay safe. Keep on saving. Don't forget, roll with the changes.