When a breadwinner dies prematurely, the family loses financial stability. A well-thought out risk management plan can protect the family and cover major expenses, like mortgage payments or college costs.
The biggest reason to have an estate plan is to protect the family, especially when there are minor children. That is why a well-constructed estate plan includes life insurance. Its chief purpose is to replace the income of the family’s primary breadwinner and protect the family’s lifestyle.
Forbes’ recent article, “How To Choose A Life Insurance Beneficiary” reminds us that there’s the task of determining who in your family needs this coverage, how much will they need and for how long. Important factors include whether you have a spouse or partner who depends on you financially, younger children who need care, or parents who will need financial help. Selecting a beneficiary isn’t always a clear-cut decision, and there are several other components to the equation that should guide your decisions.
Type of Policy. As time goes on, your family may need your financial income less, and that’s where understanding the difference in whole and term life policies plays an important part. If financial coverage is needed most when your children are of a certain age, buying a term life policy lets you control that. A term policy will only be paid out to your beneficiary, if you die during a fixed span of years (e.g., 10, 20, 30-year policy). In contrast, whole life insurance lasts your whole life. Your children will likely be grown, but the policy proceeds could be used for your grandchildren.
Designating multiple beneficiaries. You may have several individuals who are dependent on your income or who’d have trouble financially, in the case of your absence. If you’re having a hard time choosing between a spouse, parent, or child, it is possible to select multiple beneficiaries. Elections can also vary in coverage. This lets you choose the right portion of your policy designated for each beneficiary you name.
Contingent Beneficiaries. If you leave your policy to just one person, have a backup or a contingent beneficiary. The primary beneficiary is an initial person to whom you leave your life insurance policy, and a contingent is the second in line to inherit the policy, if the primary beneficiary dies.
Beneficiary designations can change. Beneficiary designations aren’t set in stone. You can change beneficiaries, in the event of major life changes.
Age matters. It makes sense that a parent would want to designate a non-adult child as a beneficiary because of their lack of income. However, it is important to consider the process that comes with that decision. Naming a minor as a beneficiary will provide much-needed coverage, but they will receive a lump sum payout of these funds when they reach age 18. In the meantime, prior to the minor becoming an adult, the funds will have to be placed in the hands of a conservator, who can only only be appointed as such by a lengthy, expensive, time-consuming court process.
A better alternative, to naming individuals as the beneficiaries of your life insurance policy, is to name a trust as the beneficiary of your life insurance policy. A trust will avoid conservatorship issues that arise when minor beneficiaries are involved. With a trust you can also designate trustworthy individuals to serve as trustee of the trust who would be in charge of the life insurance policy proceeds and can invest those proceeds wisely until a designated age at which your children or beneficiaries could become their own trustee or receive the proceeds outright. A trust is the best way to address many unknown future issues that may impact your family and the proceeds from your life insurance.
The critical part of selecting a beneficiary designation is first figuring out who will most need the proceeds from the life insurance policy and then, determining who will be responsible to ensure that the proceeds are used for the correct purposes. If you have questions about how a trust could help solve many of the issues that need to be addressed with your life insurance policy, contact the Soto Law Firm today for a free consultation.
Reference: Forbes (March 27, 2019) “How To Choose A Life Insurance Beneficiary”
Suggested Key Terms: Inheritance, Financial Planning, Beneficiary Designations, Life Insurance