As you can see with practically any local news story, it's impossible to know what life has in store. If you are a parent or you have anyone depending on you financially, life insurance is a must.
But recently, 11 major life insurance companies agreed to pay $763 million to the heirs of deceased policyholders after it was discovered the companies continued billing customers for their policies even after they had passed away.
This agreement is the second in the last two years to be reached with insurance companies, which had previously agreed to provide restitution and do a much better job of locating beneficiaries after being sued by the attorneys general of several states for not paying out benefits to the heirs of deceased policyholders. This pattern indicates we all need to do a better job to ensure that the life insurance benefits we pay for come back to our heirs in the way we intend.
Here are five tips for making sure your heirs benefit from your life insurance benefits:
Be truthful in your application. If you have not been completely forthcoming about a major medical issue or your health habits (smoking, drinking, and so on) in your application for a life insurance policy, the policy could be declared null and void and your heirs would be out of luck.
Don't let it lapse. If your family is counting on life insurance benefits to pay the bills should something should happen to you, make sure you are paying the premiums timely on the policy. The policy lapses if the premiums aren't paid, and your family could be left unprotected.
Have a beneficiary backup plan. Having a beneficiary on your policy who dies before you do is a recipe for disaster—and it happens much more than one may think. Designate a secondary as well as a final beneficiary for your life insurance benefits, and update them as the need arises. And if you have a trust, it typically is recommended that you name your trust as the beneficiary of your life insurance benefits, rather than naming an individual or series of individuals (see a trusted attorney on whether this is the right choice for you).
Play it safe. If you die because you engaged in risky behavior not covered by the policy, or you take your own life, your heirs will likely receive back only what you paid in premiums, and not the full value of your policy.
Talk about it with your family. The primary reason a vast majority of potential beneficiaries never see a dime in life insurance benefits is because policies were lost or misplaced and family members were never told of their existence in the first place. So if you have a life insurance policy, let your family know. And ask them if they have one too. You should prepare an asset profile and keep it updated annually so that nothing goes unclaimed after your passing.