Parents: Avoid These Life Insurance Mistakes
Today I want to talk about some mistakes that parents typically make when it comes to their life insurance. Life insurance is an important tool that helps us as parents to make sure that our children have financial resources if something happens to us. We want to make sure that they have a childhood we want to give them and that they're brought up how we would want them to be. I find that many parents make some fundamental mistakes, which I want to help you avoid.
For most people, your spouse will be the primary beneficiary of your life insurance policy. If I die tomorrow, I would want to make sure that my wife has enough money available to her to continue raising our children the way we intended, without bearing an additional burden financially. But what happens if both of us aren't available? Wow do we make sure that our money is available to our children?
It might seem like an easy answer: just leave the money to the kids. But, when children are under the age of 18 (when they need life insurance proceeds the most), they cannot receive that money in their name. What that means is that a court is going to step in and appoint somebody to be paid out of the proceeds of that life insurance to manage that money until your kids turn 18. This is not what you want, because the person appointed has no idea about your kids or your desires for your kids, and frankly will not care. So, that is not a good approach to take.
Another approach that some people take is to leave the life insurance to the guardians they have designated for their kids. It's a perfectly logical idea, because if Uncle Joe is going to take care of the kids then why not leave that life insurance money to Uncle Joe? There are three main problems with this plan:
First of all, Uncle Joe is under no duty to apply that money to childcare – it's not the kids' money. It's Joe's money and he can do with it whatever he wants. I know we want to trust people, and believe that they would do exactly what they've agreed to do, but we don't want to leave our children's future up to chance.
Second, if Joe were to pass away, that money that was left to Joe would not automatically go to your kids; it would go to whomever Uncle Joe had designated his property to either in a will or through state law, and that can be an unintentionally terrible result.
Third, we can't be sure that any money Uncle Joe has left over would ultimately get to the kids. For all these reasons, it is not a great option to leave the money to the person you've designated as guardians for those reasons.
The best approach is to leave the money to your kids through a vehicle called a trust. You can set this up through a will, and it creates a vehicle to hold that money for the kid's benefit. You would appoint somebody (e.g., their guardian) to manage that money for your kids, and then when the kids reach a certain age (which you designate), they would receive that money for themselves. This is the best way to make sure that life insurance proceeds go to them when they need it the most. You don't even have to worry about when that money is needed, because the trust will determine when that's going to be applied for their benefit by a trustee, and when they're going to be old enough to have that money to use on their own for their own purposes.
So if you have any questions about this, or want to review some decisions you've made with regard to life insurance, drop us a line and we'd be more than happy to help you out.