Your Young Children Might NOT Get the Benefit of Your Life Insurance

September 10, 2014 - Posted by: admin - In category:

taxes - No Responses

Without correct planning, your minor children may NOT receive life insurance proceeds you intended for their benefit.
Here in Utah, I often have conversations with parents of young children. During the course of such conversations, the topic of life insurance frequently comes up and usually such parents inform me that since they have one or more life insurance policies (and no other planning), they believe that they have adequately protected themselves and their young children. This is a common belief. Unfortunately, this is also a common misconception because the reality is that an insurance company will NOT pay life insurance proceeds to a minor child and without more in place than just life insurance, minor children could be very much unprotected and left in “limbo” should something happen to their parents.

At the very top of a life insurance form that is sitting on my desk, in bold text is the following:

“We STRONGLY discourage the naming of minor children as Primary Beneficiary. Death proceeds cannot be paid to minor children. A Trust or Guardianship must be established for a minor to receive the claim proceeds.”

Similar language is found on most life insurance forms and whether or not such language is included on forms, THAT IS THE REALITY!! In other words, if something happens to me and my wife and we have no Trust established and no guardians appointed for our young children, the life insurance companies to whom we have been paying premiums all of these many years would just sit on the money and refuse to pay the life insurance benefit until someone initiated a court procedure and had guardians appointed for our young children and a custodian appointed to safeguard the life insurance proceeds. ONLY THEN would the life insurance company pay the money for the benefit of our minor children. By the way, that court procedure might take some time and it might be anything put inexpensive. In the interim, our young children would continue to be in “limbo”, without an official guardian and without the benefit of the life insurance and other assets we had intended to cover their health, education, maintenance and other support.

The solution to the parade of horribles outlined above is for parents of young children to hire a competent estate planning attorney to provide a customized plan for such parents and their minor children, including a Trust (either inter vivos or testamentary) that will receive life insurance proceeds and also hold other assets. Such plan will also appointed guardians for such minor children. Then, VERY importantly, the parents will coordinate with their life insurance company and other financial institutions to change beneficiary designations and make other changes to insure that such institutions direct such monies and other assets into such newly established Trust at the appropriate time.

This may sound like a lot of work and in truth, it is something of an endeavor to complete these things and there are associated costs. At the same time, parents of young children who have taken these steps can then sleep much better at night, knowing that they have done the right thing to ensure that their young children and protected and provided for in the event of an unfortunate circumstance.

Please contact us with any questions. We are here to help!

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