There are many ways to say “I love you.” One of them is to leave the gift of life insurance for those you love. But if you aren’t careful in how you give that gift, you could accidentally be saying, “I don’t love you” when the life insurance company writes the check.
1. Naming a minor child as the beneficiary.
This is perhaps the most common mistake when naming a beneficiary to a life insurance policy. It’s common because we love our kids, and of course we want them to receive part of our life insurance proceeds. But we forget that they cannot legally manage that money by themselves. In most states a child may not receive a life insurance benefit directly; the insurance company will almost certainly ask a court to appoint a guardian to handle the money. That guardian may or may not be the guardian appointed to care for your children, and it may even be someone you would never have chosen in a million years to manage your children’s money.
Possibly worse than this, your child will reach the ripe old age of 18, and suddenly be given full legal control over a tremendous amount of cash. In one day. For most 18 year old kids, it’s like winning the lottery- and the “winnings” will last them just about as long as most 18 year olds manage to hang onto that kind of money. Not. Very. Long.
The solution is simple: work with an experienced life insurance agent, and consult with your estate planner to craft the best solution to distributing the life insurance proceeds.
At the very least (though this is not always the best solution), name an adult custodian to receive the proceeds under the Uniform Transfer to Minors Act, otherwise known as UTMA. But this can be complex, and must still be done carefully with help from an attorney.
A better solution is often to set up a trust as the beneficiary of the life insurance proceeds. A trust can avoid lengthy and expensive probate issues and family fights over guardianship after the fact. Trusts are not always the perfect solution… but they can be in your particular case.
To summarize:
- Don’t name a minor child as a beneficiary.
- Always consult an experienced life insurance agent.
- Bring your attorney or estate planner into the discussion.
Many people use “over-the-counter” solutions when it comes to buying life insurance. It’s been called bank-teller estate destruction. Don’t do it.
Call me for help with questions about your life insurance beneficiary. I’ll take the time to listen to you and your needs, and I will explain all of your beneficiary options in detail.