Life Insurance : Why You Shouldn't Name Your Minor Children as Beneficiaries
You're trying to be a responsible parent, and get all of your ducks in a row. You're planning ahead for all of the "what if's" that life could possibly throw at you, and making sure that no matter what happens that your spouse and/or your children will be taken care of.
You want to make sure that your kids will always have a roof over their head, food on the table, and the money to pay for their future education to get them off to a good start. This is how you continue to take care of them whether you're there or not. So naturally you would think it would make sense to name them as the beneficiary on the policy, right? It's a common mistake that many people make. But here's why you could unintentionally be leaving your kids with a huge problem on their hands if you do this:
Why Your Child Shouldn't Be Named as a Beneficiary
Life insurance proceeds has a purpose for your children. So it seems counter-intuitive at first to not name your kids as the beneficiaries of the policy. But the reason for this is because there are numerous pitfalls that you could be setting them up for if you do.
First off, minor children cannot directly receive the proceeds from a life insurance policy. So if something should happen to you while your kids are still minors, this means the court system will get involved, which is never a good thing. Entanglement with the court system is expensive, time consuming, and intrusive. And it delays having the funds being available to do what you need them to do . . . pay for the care of your children. The court system will appoint a guardian for the money. A stranger does not know your children, or have the same deep, vested interest in serving their best interests for their future like you do.
If you have a spouse who would be the children's guardian in the event of your death, but your children are named as the beneficiary on your life insurance policy, that person would have to petition the court to act as guardian to the money (which takes time, money, and headaches), unless you appoint them now. If you are separated, in the process of divorce, or you're already there, it is especially important that you make sure your wishes for how you want the life insurance proceeds to be used are spelled out. You would do this by setting up a trust, and having that trust be the beneficiary of the policy.
Another reason? Imagine all of that money falling into the hands of your child on their 18th birthday. I don't know about you, but I don't think the odds are very great that an 18 year old would successfully manage half a million dollars. How good were you with money at that age? So what do you do?
Best Practices For Making Sure Your Life Insurance Policy Benefits Your Children
If your intended beneficiary is a minor, it is a good idea to arrange for the benefits of the life insurance policy to go into a trust until that child is about 25 years old (or whatever age you choose.) While the funds are still in the trust, it can only be used for the specific purposes you designated when you set it up. No one else can use the money at all.
If you have a spouse who would make a good trustee, specifically designate them the trustee in advance. Your marriage alone will not necessarily make them the trustee. The goal is for them to avoid having to petition the court for an appointment.
If you are a single parent, appoint someone who you trust to oversee the funds and carry out your wishes
Do what you can to avoid appointing more than one trustee. This almost always leads to problems. The best way to ensure the trust is being run according to your wishes is to be as specific as possible when you create it. You need to be clear about what a trustee can and cannot do with the insurance money. If you don't, even if they're the person you appointed as trustee they may not be able to manage it the way you intended.
Already Named Them the Beneficiary? It's Okay, Follow These Steps:
If you already have a life insurance policy where your minor children are named as the beneficiary, don't worry. It's not too late. In most cases it's a simple process of calling the insurance company and requesting a "Change of Beneficiary" form. Work out the details with the trust and trustee, submit the paperwork, and you're done. An attorney can walk you through the process and answer all of your questions about setting up a trust, and your life insurance agent (or the life insurance company) can help you update your beneficiary information so that you don't have to worry about making sure it's done right.
You care enough to plan ahead for the well being of your child, so make sure that you're really doing everything you need to do to take care of them in the best way possible, and avoid putting them through hurdles that as children they're unable and not experienced enough to deal with.
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