Life insurance is bought with the best intentions of the family as its primary objective.
Most people don’t really give a thought about the beneficiary’s portion of their policy.
In most instances, we name the spouse as the main beneficiary on our life insurance policy.
The majority of insurance companies would also ask that you name a secondary or contingent beneficiary. Most of us think we want to keep it in our immediate family so we name the eldest child or all of the children as contingent beneficiaries. Sound pretty reasonable and straightforward doesn’t it?
What could go wrong? I hate to tell you this, but things could go wrong once you make a wrong move.
Life Insurance Dilemma: Two Scenarios
There are two types of scenarios to consider. This includes homes with two parents and homes with a single parent. With two-parent families, we tend to consider it unlikely that both parents will die simultaneously or within very short periods of each other, but it does happen.
On the other hand, there are many single parents out there and they might be disinclined to name the other spouse as beneficiary. In both instances, the insured parent will likely mark down their child or children as either a contingent or as primary beneficiaries.
Both scenarios can be problematic. First off, did you know that in the majority of states, under aged children cannot be recipients of life insurance benefits until they reach the age of majority, which is normally either 18 or 21 years of age, in most states?
If the children are minors, they will not receive the money until they reach the age of majority. The reason behind this is simple, what would a 14-year old do if they suddenly receive a windfall of a $250,000? Let your own imagination wonder what they would do.
Life insurance is intended to help the surviving children financially, but the law realizes that young people may not be that fiscally responsible.
Life Insurance Beneficiaries: The Court Intervenes
So, what happens? If you haven’t taken the time to name a specific guardian or someone to act as a trustee, the court will do so of their own volition. If you haven’t designated a guardian or trustee, the courts will decide. The person they name to act as guardian could end up being the last person you want to be responsible for the money. Also, the courts could also seriously impose restrictions on how the insurance proceeds will be spent or distributed.
These types of scenarios have led to many severe family financial difficulties and interminable legal squabbles.
How can you avoid this from becoming a problem and ensure that your children are best protected?
Worst Case Scenario: How to Deal with It
The answer is not all that complicated. To guarantee that your children get the best protection in a worst case scenario is to designate someone to act as a both a guardian and trustee of the estate, or to designate someone to act as a guardian and any other person or entity (such as the family lawyer) to act as a trustee.
By setting up a trust for the distribution of the insurance proceeds you can stipulate quite clearly how and for what reasons that money can be accessed for your children until they reach the age of maturity. The provisions and requirements for this may vary somewhat from state to state so you should do some research before you proceed in setting up a trust or designate someone to act as guardian.
A guardian alone may not necessarily be sufficient depending on the laws of the state in which you reside. A guardian may have limited or even no access to funds if a trust or trustee has not been set-up or appointed. To set up a living trust, you might be best advised to talk to a lawyer who specializes in estate law.
Life Insurance Beneficiaries: Just a Minor Problem?
Generally speaking, although your intentions might seem that you have the best interests of the children in mind; it is not advisable to name your children as beneficiaries when you buy a life insurance policy.
If you need more information on this, you can also feel free to ask questions by calling our agency,
McKinnon Insurance, to fully understand the ramifications and problems which might occur when naming your children as either primary or contingent beneficiaries.