You have done a wonderfully responsible thing by purchasing life insurance to protect your children in the event that something happens to you. You sleep better at night knowing that you have protected their financial futures. Have you thought of everything?
You filled out the paper work and named your spouse as the first beneficiary. Did you name a contingent beneficiary?
Of course you did, because you know that your children would need the financial support the most if both you and your spouse passed away at the same time. A horrible thought, but one you have accounted for with your plan. (For considerations involving the guardianship of your children click here)
Naming your children as contingent beneficiaries of your life insurance policies can actually have several unintentional consequences - two that I want to address here.
The proceeds of a life insurance policy naming minor children as beneficiaries will pass through probate
You decide who will get your life insurance payout by using a mechanism called a beneficiary designation. This is efficient element of life insurance because it means that the life insurance payout will not pass through the probate process and instead will be paid out directly to the named beneficiary by the insurance company. (In fact, a beneficiary designation will actually trump your will, so be aware of those considerations as well).
However, if the proceeds of your life insurance are directed to a minor child as a contingent beneficiary, the insurance company will NOT pay out the proceeds directly to the minor. We can all agree that most of our children probably wouldn’t be thinking about how to reinvest the money – so its is a good thing they wouldn’t end up with it outright at a young age.
What this ultimately means is that proceeds of your life insurance payout would pass through the probate process. Without going into all of the negatives of the probate process, what this means is that a judge will decide who will controls the life insurance proceeds and when your child receives them.
Now that their minor kids are involved in the probate process, the issue that distresses most of my clients is the fact that their children’s names will now be part of a public probate court proceeding where any hustler or predator could learn how much money they are set to inherit.
Don’t unintentionally expose your minor children to the probate process on account of not understanding how beneficiary designations work.
Want to speak with me about what you can do to ensure that your beneficiary designations are set up correctly? Click the button below to schedule a 15 minute informational call with me!
If you have designated your child as beneficiary of your life insurance policy, the court will distribute the entire proceeds of the policy outright to your child at the age of 21.
This means that your (technically adult) child will be given a large chunk of cash to do whatever he or she wants to with it.
I ask my clients to consider what they would have done with a $600k or $1.5m check on their 18th or 21st birthday. This unpleasant thought usually elicits some nervous laughter from the parents. What is even worse, is that in this nightmare situation our children would not even have the benefit of the guidance of their parents at this time. They would be on their own and with a lot of cash in their pocket.
After two minutes of contemplating this, we know that our children would probably irreparably damage their chances of having a fulfilling and productive life within a very short amount of time. Anyone would with that much spending power and no life experience or wisdom to temper it.
Understandably, my clients are usually interested in taking steps to protect the proceeds of their life insurance policies for their children’s benefit in a private trust, not a limited, court sanctioned one. This not only addresses the privacy issue discussed above but allows their financial needs met immediately, but restricts access to large chunks of money until later in life.
My firm also works with them to establish a trust that can protect their children’s inheritance for life, not only from themselves but from lawsuits, divorce and bankruptcy. This is very rewarding for me because I have personally witnessed the negative effects on a young person when they come into a large amount of inherited money outright.
If you are interested in having a discussion about any of these issues and you would like a personalized review of your beneficiary designations, please click the button below to schedule a phone call with me. I look forward to speaking with you!