Crafting a thorough Life & Legacy Plan involves designing a plan that allows you to fully relish your life while safeguarding your loved ones’ future in your absence. While life insurance is indeed a straightforward method to ensure your loved ones’ security, it’s crucial to structure your policy correctly for optimal impact on your family.
How you choose your beneficiaries for your insurance policy can really affect how well it works, how it gets used, and who gets to manage it once you’re gone. In this blog, we’ll look at the dos and don’ts of naming beneficiaries on your life insurance to make sure your loved ones get the support they need when something happens to you.
DO NOT Name a Minor As The Beneficiary of Your Life Insurance Policy
Choosing your child or grandchild as the main or alternative beneficiary for your life insurance may seem like a logical move, but doing so could lead to unfavorable outcomes for your loved ones.
If you choose a minor child as the beneficiary of your life insurance, it triggers a legal process called “guardianship” or “conservatorship.” This process involves appointing a legal guardian or conservator to oversee the assets for your minor beneficiary until they reach 18. Once they turn 18, the minor child, now a young adult, receives everything from the account outright, without protection, oversight, or guidance. This outcome is far from ideal for everyone involved.
When you’re getting life insurance, the goal is to improve the lives of your loved ones. We often say, “insurance says I love you.” However, designating a minor child as a beneficiary doesn’t convey love; it indicates that you didn’t set up your life insurance correctly. While you might consider naming a trusted family member or friend as the beneficiary, hoping they’ll use the funds for your kids, it’s not the right move!
If you name another adult as the beneficiary for a life insurance policy intended for your kids, your kids will have no legal right to the money – which means the adult you named as beneficiary can use the money however they want and don’t have to use it for your kids at all!
So what’s the solution? Keep reading until the end to find out what to do instead.
DO NOT Name Adult Beneficiaries Directly or They Risk Losing The Money Entirely
Sending money directly to adult beneficiaries might seem simple, but it can lead to unexpected problems. Life situations change, and the lump sum from a life insurance policy could be at risk if not handled carefully. By steering clear of direct payouts, you can make sure that the financial security from the insurance is preserved for the long haul.
One key concern is the potential for beneficiaries to hastily misuse or exhaust the funds. A sudden windfall might lead to imprudent spending, leaving your loved ones without the financial support you intended. Additionally, if your beneficiaries are not financially savvy, they may struggle to manage a lump sum effectively, meaning the policy might lose money over time.
Even if an adult beneficiary is financially responsible and savvy – or knows enough to speak to a financial advisor – life events can put the funds at risk. Because the life insurance proceeds now belong entirely to your beneficiaries in this case, the proceeds of the policy are now completely vulnerable to any future divorces or lawsuits that your beneficiary may go through in the future.
That means that if your beneficiary is divorced, sued, or accumulates debt, all the money they received from your insurance policy could be lost.
Plan For Your Life Insurance The Right Way: Use a Trust
A Trust is an agreement you make with a person or an institution you choose. This person is called your Trustee, and their directive is to manage the assets you put into or leave to your Trust, according to the rules you create.
Instead of naming minors or adult loved ones as the direct beneficiaries of your life insurance, name your Trust as the beneficiary of your policy instead. By doing this, your loved ones will still receive the funds you intend for them while maintaining control over how the funds are managed and distributed. This ensures that your wishes for your assets and your loved ones are carried out even after you’re gone.
How does it work?
A well-drafted Trust allows you to specify conditions for distributing the Trust funds, ensuring that the funds are used for intended purposes such as your beneficiaries’ education, homeownership, or other specific needs. Distributions from the Trust can also depend on the ages and circumstances of each beneficiary. This level of control can prevent the misuse of funds and promote responsible financial behavior for everyone involved. Plus, assets held in a Trust bypass the probate process, ensuring a more efficient and timely distribution of funds to your beneficiaries. This can be crucial in providing immediate financial support to your loved ones when they need it the most.
And while you can choose to have your Trustee distribute life insurance proceeds directly out to your beneficiaries outright, at specific ages and stages, you may want to provide even more protection for your beneficiaries. One of the considerations we’ll help you make is whether to retain the assets in trust, giving your beneficiaries control over the Trust assets, but in a manner that keeps the inherited life insurance protected from lawsuits, future divorces, and creditors.
Let Us Set Up Your Entire Plan In The Best Way Possible
Setting up your life insurance policy with the right beneficiaries involves careful consideration of your unique family dynamics, financial goals, and long-term objectives while being proactive to avoid future issues. By doing so, you maximize the benefits of your life insurance to provide a lasting legacy of financial security and support for your loved ones.
But planning for your life insurance is only one step in creating a plan for everything you own and everyone you love today and in the future. As your attorney my mission is to guide you to create a comprehensive estate plan, which I call a Life & Legacy Plan, that ensures your wishes are fulfilled and your family’s future is protected no matter what the future holds.
At Cheever Law, APC, 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, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a no-obligation 15-minute introductory phone call today.