The #1 thing to avoid doing on your Life Insurance
The COVID-19 Pandemic is here. As a responsible, proactive parent, you’ve created a well-thought-out plan to address “the what ifs” in life to assure that your spouse and children are financially protected.
You bought life insurance to cover your earnings for the next 20 years. As a loving parent, you want to make sure the life insurance paycheck will replace your lost income.
They are off to a good start in life. Their lives will continue whether you’re around or not. Basically, you’re on a roll!
The next step is to name the kids as beneficiaries on the life insurance policy.
Makes sense, right?
In reality, it’s the #1 thing to avoid doing on your life insurance and one of the most common mistakes people make. Sadly, the results could accidentally leave your kids with a real big problem on their hands.ª
It seems logical to name the children as beneficiaries of the policy. However, there are many drawbacks associated with this thought process, mainly due to how life insurance proceeds are distributed.ª
Minor children cannot directly receive income from a life insurance policy. If something should happen to you, the court system is immediately brought into the picture. This is never a good thing.
Involving the court system is an expensive, time-consuming, intrusive process, specifically during the most difficult time in your children’s lives.
Furthermore, it prevents them at the moment from being able to use the money to pay for their care as intended. The legal system has now tied down and delayed immediate access to the funds.
It gets worse. The court will appoint a total stranger as a guardian for the money, a stranger to your children. Someone who, in reality, may not have a vested best interest in your kids’ financial security.ᵇ
What happens if a spouse is an obvious choice to be the children’s guardian, but you had previously named the children as beneficiaries on your life insurance policy, and you die all of a sudden?
Immediately, the person would have to petition the court to be named as guardian to the money.
The results? The court system is now brought in. Creating additional expenses and other unnecessary headaches. Valuable time spent with the children will also be lost.
Hence, the time to appoint the guardian is now.
If you’re separated or already divorced, make sure the life insurance benefits will be used according to your specific wishes.
How? By setting up a trust and naming the trust as the beneficiary of the policy.
Here’s an eye-opener. Imagine your child receiving a half-million-dollar check on their 18th.birthday. What are the chances that an 18-year-old will manage that money wisely?
Only two. Slim and None. And Slim left town!
Completing a Life Insurance Application? Follow these Guidelines.
Fortunately, Here Are Steps to Assure Your Life Insurance Policy Benefits Your Children:
- If a minor is the intended beneficiary, make sure the life insurance money will go into a trust until the child reaches 25 or at whatever age you choose.
- The trustee can only use the benefits for the specific purposes you named when you started the trust. No one else will be able to use the money.
- You can specifically designate a spouse as a Trustee ahead of time. This will help her avoid the hassle of requesting a court appointment to be named a trustee at the wrong time.
- If you are a single parent, name someone you absolutely trust to supervise the funds and honor your wishes.
- Review your life insurance policy and beneficiary designations every year.
Are the kids already named the beneficiaries? Don’t worry. It’s not too late. Usually, all it takes is a simple call to the insurance company and request a ‘Change of Beneficiary” form. Once you’ve worked out all details with the trust and trustee, send the form, and you’re all set. An Estate Planning attorney can help you through the process of setting up the trust. After that, your life insurance broker or the life insurance company can help you update your beneficiary information so that it’s done right.
In conclusion, your children’s well-being comes first. Take every step necessary to ensure their well-being by removing the hurdles they will need to avoid due to their lack of experience. This is the legacy that you will leave them with—the Gift of Love.
Remember: We can’t predict. We can prepare.
ᵃ10 Common mistakes when choosing life insurance beneficiaries- Barbara Marquand-reviewed by Ashlee Tilford-August 2, 2021-Insure.com
ᵇ Big Mistake: Naming A Minor the Outright Beneficiary – Of Anything! – Rarick & Beskin Law firm- December 1st, 2016