The following is a guest post from Veronica, a legal assistant from Philadelphia

You’ve decided to purchase life insurance so that your family will be taken care of should something happen to you. Wise decision.

Before you purchase a life insurance policy, know that insurance companies only make money for their shareholders when they don’t pay death benefits, so they look for any reason not to. Also, insurance agents and companies make more money when you purchase large amounts of coverage that perhaps you don’t need.

Follow these six tips to ensure that your beneficiaries receive the payout you intend them to receive, you have enough insurance coverage, and you are not paying for coverage you do not need. These tips are from the office of a busy national life insurance attorney.

Tip #1: Disclose All Past and Current Health and Lifestyle Habits

Whether you meet with an insurance agent to apply for life insurance coverage or complete the application and medical questionnaire yourself, you must answer every question regarding your health, medical history, and past and current lifestyle habits truthfully and in full.

Why? Because if you don’t and you die within the first two years of the policy term, called the “contestability period,” the insurance company can deny your beneficiaries’ claim for death benefits due to your alleged misrepresentation even if your death was wholly unrelated to the fact allegedly misrepresented by you. And if you die later in the term, the insurance company will deny your claim and that denial may be upheld if your death was due to the condition or habit you failed to disclose.

That’s right. You could faithfully pay life insurance premiums for years only to have your beneficiaries’ claims denied because you forgot something, lied about something, or failed to disclose something on your initial application and medical questionnaire.

Why does the insurance company need to know your medical history, past and current medical conditions and surgeries, and past and current lifestyle habits? Because the insurance adjusters rate you according to the risk you pose of dying within the policy term and having health conditions or lifestyle habits that may shorten life will make you more of a risk for them. For this reason, you will pay a higher premium than someone who does not have those medical conditions or endangering lifestyle habits.

What are “lifestyle habits?” Lifestyle habits are choices you make that affect the likelihood of you dying within the policy term, and include these among others:

• Imbibing alcohol occasionally or socially;
• Abusing alcohol;
• Alcohol addiction;
• Using illicit drugs or prescription medication not prescribed for you;
• Dependence on such drugs;
• Abuse of such drugs;
• Smoking cigarettes or cigars;
• Vaping;
• Abusing food, causing obesity;
• Engaging in dangerous hobbies or sports, such as deep-sea diving or skiing;
• Traveling to countries considered dangerous by the insurance company.

Be sure to disclose everything asked for. This way, your beneficiaries will receive the money you want them to receive without having to fight the insurance company over alleged misrepresentation on your part.

Tip #2: Review Your Initial Application and Medical Questionnaire for Accuracy Before Signing

If you work with an insurance agent to apply for life insurance coverage, the agent may well ask you questions and fill out the application and medical questionnaire online for you. That’s fine, but you absolutely must review it carefully before you sign it. 

Why? Because insurance agents are salespeople. They make money by opening new policies. It follows that their incentive is to get you signed up, not make sure your beneficiaries get paid. There have been many, many cases of life insurance claims being denied when the agent filled out the initial documents improperly, make a mistake, failed to ask follow-up questions when warranted, or even intentionally left facts out that would affect the amount in premiums you pay or even if you could get life insurance at all. Then the insured did not review the documents carefully and signed off.

If your agent fills out the forms for you, that is fine, however, you absolutely must review the entire document to make sure that every question was answered truthfully and in full. Also, make sure your name, occupation, address, marital status, and age, and date of birth are correct. Believe it or not, these facts are taken into consideration when underwriting a policy and setting the premiums, and a mistake made in any of these will result in an allegation of misrepresentation.

Tip #3: Name Specific Beneficiaries and Contingent Beneficiaries

Hopefully, an insurance agent would point this out to you, but if you are filling out the application for life insurance online on your own, you may not know that if you do not name a specific beneficiary – by name – you create a potential beneficiary dispute, or, if there is no beneficiary, the death benefits become part of your estate and are taxable to your heirs, if not eaten up with creditors’ claims.

To ensure your intended party or parties receive the death benefit, you must designate them by name. In a case where one gentleman named “his children” as his life insurance beneficiaries, who did he mean? He had one child out of wedlock, two children from a first marriage, another child in a second marriage, and had two step-children from that second marriage. Do they all split the benefit? Only his biological children? Only the children conceived in marriage?

Not only must you designate a primary beneficiary by name, but you should also designate a contingent beneficiary. Why? If your primary beneficiary dies before you do or otherwise cannot be found, your contingent beneficiary or beneficiaries will receive the death benefit. If you do not name a contingent beneficiary and the primary beneficiary is unavailable to collect the death benefit, again, the insurance company will pay out to your estate. Eventually, your heirs will receive some money, that is, if it is not eaten up by creditors’ claims on your estate or income tax.

You can avoid possible beneficiary disputes and exposure to taxation and creditors by simply designating primary and contingent beneficiaries by name.

Tip #4: Tell Your Named Beneficiaries That They Are Beneficiaries

Inform your beneficiaries that you named them as beneficiaries to your life insurance policy, where the policy documents are, and the length of the policy term. That way, if something happens to you, they know what to do. 

Another reason to let them know is if there is a fraudulent beneficiary change. For example, if someone forges your signature to a beneficiary designation change application, or someone takes advantage of you to coerce you into naming them beneficiary instead, your beneficiaries will know there is a problem and can challenge the fraudulent beneficiary designation change in court.

Tip #5: Purchase the Right Type of Insurance for Your Situation

There are two types of life insurance: whole life and term life.

Whole life policies, also called permanent or universal life, accrue present cash value as you pay premiums. You can borrow against the balance of what you’ve contributed, or even lend or withdraw up to that amount. There is no set term of expiration: your beneficiaries receive a death benefit when you die and that death benefit is not taxed as income to them.

Whole life policies carry significant administrative fees and are also subject to market variables. For these reasons, they are purchased primarily by high-worth individuals who have maxed out their other retirement savings vehicles and want another way for their heirs to receive tax-free money when they die.

Term life insurance is what it says it is: a policy that covers you for a set term of years, say, 10 or 20 or 30 years, and if you pay the premiums in full and on time as they come due, your beneficiaries receive the face value of the policy if you die within the term. If you fail to pay premiums or die after the term, coverage will have terminated and your beneficiaries get nothing. Term life insurance can be much less expensive than whole life insurance for these reasons.

If you are a high-worth individual looking for another place to deposit money and have it earn interest or dividends tax-free until retirement, whole life is for you. If you are a young person just looking to have end-of-life expenses paid or the primary breadwinner of a young family, term life is for you.

Tip #6: Be Sure to Purchase Enough Insurance Coverage for Your Needs, But No More

How do you calculate the amount of life insurance you need? The answer to that is determined by the reason you want to purchase life insurance.

If you are single and have no dependents, you may want to purchase just enough life insurance to cover funeral expenses and final creditors’ bills. Policies for $5-10K are easily purchased online.

If you are married and/or have dependents and you are purchasing life insurance to provide for them if something happens to you, you need to evaluate what the death benefit is intended to replace. Annual income? If so, for how long and how much? Mortgage payments? If so, for how long and how much? The higher education or occupational training costs of your kids? 

A person having a young family may wish to “ladder” several policies of different amounts of coverage and terms to customize coverage as the family matures. For example, in a two-parent household where one parent works full-time, the other parent works part-time, there are three children ages 12, 10, and 4, and the family is eleven years into a 30-year mortgage, the primary breadwinner may calculate that he or she needs $500,000 in coverage.

Instead of purchasing a 30-year $500,000 policy and paying premiums on that amount for thirty years, he or she might consider laddering the following three policies to save money in premium payments:

Policy #1: 30-year $100,000 policy 

Policy #2: 15-year $200,000 policy

Policy #3: 10-year $200,000 policy

For the first fifteen years, the family has $500,000 total in coverage to supplement the spouse’s part-time income, pay the mortgage, and pay the educational expenses of the eldest two children.

For the next five years, the family has $300,000 total in coverage to supplement the spouse’s income, pay the mortgage, and pay the educational expenses of the youngest child. Policy #3 will have expired, saving you money in premiums.

For the next 15 years, the family still has $100,000 in coverage from the remaining policy to pay off the few remaining payments on the mortgage and supplement the spouse’s income. Policy #2 will have expired, again, saving you money in premiums.

The situation of every insured person is unique. Take some time to evaluate your situation and purchase just enough life insurance to cover any contingencies that may arise.

About the Author

Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a life insurance beneficiary attorney.

Disclosure: Some links are affiliate links that earn me a commission.