Naming Children as Beneficiaries of Life Insurance Policies

Should you name your children as beneficiaries of your life insurance policies? Probably not!

Many people don’t give too much thought when choosing someone to be the beneficiary of a life insurance policy. Most people name their spouse as their primary beneficiary. Then, when it comes to contingent beneficiaries, many people either don’t list anyone at all, or in some cases, they list their minor children as the beneficiaries. It all seems so simple and straight-forward.

One of the biggest mistakes you can make is naming a minor as beneficiary. At first, it seems like a great idea. After all, you want your kids to get the insurance money…don’t you? However, what you may not realize is that doing so can create legal and practical problems. For example, I have a $1 million life insurance policy. However, my son is 11 years old, and my daughter is 9 years old. If my wife and I pass away in a common accident, do you really think our life insurance company is going to write a check out to my kids? Even if the insurance company would write checks to minors, do I really want my kids getting $500,000 each at such a young age with no strings attached?

So what is going to happen? The life insurance company will typically offer two choices. First, the child can wait till he/she is 18 years of age (believe it or not, that is considered adulthood) and then get a check for the full amount. Getting large amounts of money at such young ages can easily lead to a squandering of those assets. Even if your child is “responsible,” he or she may be subjected to pressures from their peers. Think about it. Do you want your kids getting such large sums of money at such a young age? Second, they could pay the money to whoever is designated as the children’s guardian. Have you named a guardian for your kids yet? Even so, that is a court process that takes time and money, and their money will still be available to them once they turns 18 years old.

If you have minors as beneficiaries of your life insurance policies, complications are bound to arise. Usually, getting a life insurance policy is supposed to provide your surviving loved ones with financial security and peace of mind. However, if you don’t give much thought to the beneficiary designations, you may be creating more problems than you have solved.

To help solve this problem, a living trust can be set up to receive the life insurance proceeds. In other words, your living trust becomes the beneficiary of your life insurance policy. That way, no one has to go to court to get the life insurance money, and the proceeds can be paid out much quicker, thereby making the money available to the family without delay. The advantage is that YOU establish the trust, YOU select the trustees, and YOU outline the terms under which assets can be used and distributed from the trust. This solution often works in the best interests of the minor children and those of other dependents, such as a surviving spouse. Therefore, by doing so, you’ve obviated the need for court intervention and the money can be managed responsibly for our children.

A living trust is not a panacea but can be appropriate for many people.  Work with your attorney to see if your family could benefit from establishing a trust as part of a broader estate plan.