Life Insurance: How to Avoid a Crash and Burn
On a balmy summer night in 2010, a dual-engine Cessna Citation jet took off from Isla Grande Airport in San Juan, Puerto Rico headed for Miami International Airport. The pilot, wealthy businessman Felix Uralde, a 68-year-old experienced pilot who’d owned the aircraft for 10 years, was the sole occupant.
Two minutes after takeoff, when the plane had cleared the coast and was headed out over the open Atlantic, the tower lost its signal. The night was clear; Uralde had logged hundreds of hours of flight time, yet nevertheless the plane had vanished.
The Coast Guard spent 3 days and conducted 14 searches spanning 6,526 nautical miles turning up nothing. The plane and it’s pilot were forever swallowed by the tropical waters.
Or were they? After a questionably speedy death certificate was produced by Uralde’s three children, Alliance Insurance decided to hire a private investigator on the island. A year’s snooping turned up that Uralde’s thriving businesses in Puerto Rico had all gone belly-up and were in bankruptcy, and his death certificate had been obtained illegally.
What’s more, Felix Uralde had switched off the Cessna’s instrumentation that fateful night and proceeded to St. Croix manually. He was now laying low on a houseboat in Christiansted Harbor with his 19-year-old girlfriend waiting for the life insurance claim to pay out so he could split it with his children and disappear forever.
This is an extreme example how people can attempt to manipulate life insurance and defraud a company for personal gain. While most of us won’t be deciding on a policy with such nefarious considerations, the process of buying life insurance is a touchy subject in itself, both to the policyholder and beneficiaries. It is important to understand the process fully and structure the policy properly in order that the full claim gets to the designated person(s).
In most states you will designate who is the beneficiary of the policy at the time of purchase. This is usually the spouse. However, the states of Louisiana, Nevada, New Mexico, Wisconsin, Texas, Washington, California, Arizona are considered community property states where the spouse is automatically selected. If you wish to choose someone else you will be required to provide written documentation from both spouses.
It is essential you take a hard look at your life insurance policies whenever big events happen in your life: marriage, children, a new job, etc. It is also advisable to reappraise your coverage and beneficiaries every five years anyway. Clearly, you’ll want to amend your plan if your main beneficiary is your spouse and your relationship irrevocably changes.
But any instance where your financial or life status changes is an ideal time to recalculate your coverage. New children means new expenses, college tuition, etc. will have to be provided for in the event you are not around.
If, for whatever reason, you make your child a beneficiary they are not entitled to the money until they are 18, which is still quite a young age to come into a large inheritance.
The life insurance payout is supposed to provide for the child to continue living his/her life as they are with as little financial disruption as possible. You love your children, but you must ask yourself if you believe they will be mature enough at 18 to handle such a windfall. Are they the sober, diligent type who will pay their college tuition, remain on budget, and save? Or are they the type to...well, you know.
If your child falls into the latter category, a smarter option would be to set up a trust and make the trust itself the beneficiary. That way you can leave specific instructions as to how much, when, and for what purpose the money can be withdrawn. A trust also keeps the beneficiary from paying estate taxes.
Speaking of taxes, although life insurance payouts are typically not subject to federal income tax, there are some situations where they are.
If you buy a policy on yourself and name a beneficiary, then you own the policy, are the one insured, and someone else gets the money. This is a tax-free situation. If you buy a policy to cover someone else and have YET ANOTHER person as the one getting the money, this would be taxable income to the beneficiary.
So if you yourself buy a policy where your spouse is the insured and your child is the beneficiary, that payout will be subject to federal tax.
Specifying whom the life insurance money should allocated to in your will is a recipe for a family disaster.
Life insurance has nothing to do with your will. It exists on its own. Your will is the instructions for divvying up your assets when you die. The life insurance issuer holds the money from your policy on its own and distributes it as to the instructions set forth in said policy. The insurance company doesn’t care what it says in your will. But family members sure might.
This could lead to family infighting and even messy legal action if someone thinks they are entitled to something because of something you said in your will.
Though it is unpleasant to talk about death, the best course of action is to get all possible beneficiaries together and clearly decide who is getting what when it comes to assets vs. insurance policies.
So there you have it, certainly not as interesting as multi-million dollar insurance fraud and phantom, disappearing planes, but useful information nonetheless in navigating the ins, outs, and possible pitfalls associated with designating who gets your life insurance money.
If you are interested in a life insurance policy, our advertising partners Haven Life offer competitive rates and a process that can be completed entirely online. Backed by MassMutual, Haven Life offers up to $1,000,000 in term coverage plus online chat and telephone support, as well as educational materials so you can make the best decision and avoid some of the above snags.