Buying Life Insurance

Time to Review

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Though it has very little if anything to do with reviewing your life insurance policies, the story in the news of a squirrel falling down a chimney and reeking havoc on a home while the owners were away on vacation sheds some light on making sure one understands the provisions of an insurance contract.

It seems that under the homeowner policy, the damage caused by the squirrel fell under the exclusion of damages caused by birds, vermin, rodents, insects, or domestic animals–with the definition of rodents including but not limited to bats, beavers, coyotes, mice, porcupines, raccoons, rats, skunks, snails, snakes, slugs, or squirrels–and the claim was denied. 

The owners of the home expressed extreme frustration toward the insurance company who had written the homeowner policy for them. Since the policy had been sold as a deluxe or special form policy, the homeowner hadn’t taken the time to either search it out or have it explained what that translated to. They made the erroneous assumption that anything that could cause a loss to occur would be covered, so they just paid the premium and went on their way. The old adage applies: “If it seems too good to be true it probably is too good to be true.”

When you purchased your life insurance policy or policies, certain needs for life insurance coverage were being addressed. The concern for having sufficient funds available to cover mortgages or other debts may have been the driving force behind the purchase, or it may be you wanted to make sure sufficient funds would be available to pay for childrens’ educations, or sufficient funds to cover the black out period of time when a surviving spouse would not have any social security funds available. You may have had a policy written to fund a buy sell agreement with a business partner being named owner and beneficiary, or the business being the owner of the policy with the buy sell agreement spelling out how the funds were to be allotted upon the death of the owners of the business. 

Time and circumstances may impact the purpose of keeping a life insurance policy in force. For example, you named your spouse as the beneficiary of your death proceeds but things fell apart in your marriage and you divorced and remarried another person. If you were to die without having changed the beneficiary designation, the proceeds of this policy would by contract have to be paid to the first wife because the life insurance contract is governed by the beneficiary designation provision, not by a will or trust. 

In our contemporary world, if in this scenario the first wife was primary beneficiary and contingent beneficiaries were the named children and she were to pass away before the named insured, the contingent beneficiary would be activated and the children of the first marriage would receive the proceeds while the second wife and children from that union would receive nothing from the policy death benefits. 

Neither of these examples would need to be addressed if a simple review had been done where beneficiary designations would have been updated.

Or this scene: You were raised as an orphan where you were treated with kindness, love, and respect. Individuals there became like parents to you and when you left the orphanage, they stayed in touch with you with personal visits, attending important events in your life, and cheered for you when you entered the military and sent overseas. In a feeling of wanting to give something back in return for their friendship, you had a life insurance policy written on your behalf and named the orphanage as beneficiary of the proceeds. You decided due to your lifestyle never to marry so you left beneficiary the same.Time marched on and the policy became paid up so no more payments were required to keep it in force.  You moved around a lot so pretty soon the anniversary billing got lost and no forwarding address was available for the insurance company to correspond with. Natural causes brought your demise. The orphanage didn’t know the policy named them as beneficiary so there would be no reason for them to follow up, and the insurance company had no knowledge of your passing–so the policy just remained in limbo. The good that could have been never occurs for the orphanage. Again, a simple review would have alleviated this problem.

Perhaps a business decision is reached where the company is dissolved and the assets are split among the owners, but somehow the life insurance policy was forgotten and continued to show ownership as being in the name of the business with the business still showing as beneficiary. One of the owners passes away and the surviving spouse finds the old life insurance policy and decides to cash it in. Unfortunately, this can’t be done because the surviving spouse didn’t have any rights to ownership nor appeared anywhere as a beneficiary. This scenario is not insurmountable, but legal action and court proceedings will definitely be involved. 

Another business issue arises with a buy sell agreement being funded by life insurance policies issued on a cross purchase basis: each owner owning the life insurance on the other owner and being named beneficiary.This would be necessary in order to have funds to buy out of the deceased’s spouse’s interest in the business. The business is dissolved leaving the purpose of the funded buy sell agreement moot. If ownership on policies is not changed or the beneficiary designation not corrected upon the death of the insured, the funds will never reach the deceased’s family. This may be all right, but some discussion beforehand may save a lot of heartache down the road.

So, not to labor the point, just a quick review will make sure ownership is proper, beneficiaries are as desired, and addresses are up to date. Just as the squirrel issue in the homeowner policy could have been better understood if a little more attention had been given, so these reviews may save considerable time and anxiety later. Hope your policies are all up to date.