September 22, 2014 - Posted by: admin - In category:

taxes - No Responses

“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.”

While it is true that each life insurance company has their own specific forms that they require clients to use when choosing beneficiaries, most life insurance companies have some variation of this warning on their form and/or somewhere else in the “fine print” of the policy paperwork.  The reality is that a life insurance company will NOT pay money to a minor child!  The same is true with banks, investment managers and other financial institutions.

Why is this such an important truth to understand and how does it apply for you?  Lets consider a hypothetical young family here in Utah, with husband, wife and two children (ages 4 and 6).  In this example, like many other parents of young children, our hypothetical parents have purchased some life insurance for both mother and father. In fact, our imaginary parents are smart enough to discover that given their young ages, they can get a bit of term life insurance coverage for a very affordable price (the insurance company believes it is a very safe bet that this young man and young woman are going to live for the next 10-20 years).  After the purchase of this life insurance, these very loving parents now sleep better at night, firmly believing that they have now done all that is needed to protect and give for their young children, in the event that something were to happen to mom and dad.HOWEVER, the truth is that if something unfortunate does happen to mom and dad, these two young children, now orphans, will have been left without proper protections by their well-intentioned parents.

In this scenario, since the only “planning” done by mom and dad was to buy some life insurance, there is no legally appointed guardian for the young children.  Appointment of guardians is accomplished through a Will (often a pour-over Will, when used in the context of a Trust-based plan).  Further, the life insurance companies will NOT pay the proceeds of the policies that mom and dad purchased to or for the benefit of these young children, unless and until someone has instituted a court proceeding to have a judge appoint and guardian to look after the children and a conservator to take payment of such life insurance and other assets for the benefit of such children.   What happens to the life insurance monies in the mean time (after deaths of mom and dad and prior to a court appointing a guardian and conservator for the children)?  The insurance company is more than happy to just sit on the life insurance money (insurance companies are VERY good at taking and keeping people’s money, after all…:)

What is the solution to this potentially horrible situation?  What is the best way for parents of young children to do EVERYTHING they can to protect and provide for their children, in the event that something were to happen to such parents?  The answer is to engage an estate planning attorney to set up a Will-based or Trust-based plan. Through such a plan, parents can designate guardians before hand–they can choose whom they would want to take care of their children.  The parents can also set up a trust-fund mechanism so that upon their passing, the insurance company would IMMEDIATELY pay the life insurance proceeds for the benefit of the children, with no delay and no court hassles.

This sounds like a MUCH BETTER approach for parents of young children, right?  It is.  But unfortunately, many parents of young children instead elect to just do nothing at all, or to instead just purchase some life insurance and then believe they have done all that is needed to provide for and protect their young children.  This is not true and it is the equivalent to mom and dad leaving for a very long trip and as they leave the house, leaving the key to the car and the check book on the table, while their young children sleep in their beds upstairs.  No parent would ever consider such a foolish course of action as this—yet so very many do something very similar in their “planning”.  I will quickly add that such parents do so in ignorance–they just don’t know any better.  They don’t know what they don’t know.

Now, having read this, YOU know better!

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