In the first part of this series we discussed the first three of six questions you should ask yourself when selecting a life insurance beneficiary. Here we cover the first half.
Selecting a beneficiary for your life insurance policy sounds pretty straightforward. But given all of the options available and the potential for unforeseen problems, it can be a more complicated decision than you might imagine.
For instance, when purchasing a life insurance policy, your primary goal is most likely to make the named beneficiary’s life better or easier in some way in the aftermath of your death. However, unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.
Last week, we discussed the first three of six questions you should ask yourself when choosing a life insurance beneficiary. Here we cover the remaining three:
4. Are any of your beneficiaries minors?
While you’re technically allowed to name a minor as the beneficiary of your life insurance policy, it’s a bad idea to do so. Insurance carriers will not allow a minor child to receive the insurance benefits directly until they reach the age of majority—which can be as old as 21 depending on the state.
If you have a minor named as your beneficiary when you die, then the proceeds would be distributed to a court-appointed custodian tasked with managing the funds, often at a financial cost to your beneficiary. And this is true even if the minor has a living parent. This means that even the child’s other living birth parent would have to go to court to be appointed as custodian if he or she wanted to manage the funds. And, in some cases, that parent would not be able to be appointed (for example, if they have poor credit), and the court would appoint a paid fiduciary to hold the funds.
Rather than naming a minor child as beneficiary, it’s better to set up a trust for your child to receive the insurance
way, you get to choose who would manage your child’s inheritance, and how and when the insurance proceeds would be used and distributed.
5. Would the money negatively affect a beneficiary?
When considering how your insurance funds might help a beneficiary in your absence, you also need to consider how it might potentially cause harm. This is particularly true in the case of young adults.
For example, think about what could go wrong if an 18 year old suddenly receives a huge windfall of cash. At best, the 18 year old might blow through the money in a short period of time. At worst, getting all that money at once could lead to actual physical harm (even death), as could be the case for someone with substance-abuse issues.
To help mitigate these potential complications, some life insurance companies allow your death benefit to be paid out in installments over a period of time, giving you some control over when your beneficiary receives the money. However, as discussed earlier, if you set up a trust to receive the insurance payment, you would have total control over the conditions that must be met for proceeds to be used or distributed. For example, you could build the trust so that the insurance proceeds would be kept in trust for beneficiary’s use inside the trust, yet still keep the funds totally protected from future creditors, lawsuits, and/or divorce.
6. Is the beneficiary eligible for government benefits?
This article is a service of The Law Offices of Jenny Ling, PLLC, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.