Life insurance can play an important role in estate planning. Many families purchase life insurance policies to provide for their children should one, or both parents, pass away unexpectedly when the children are still under the age of 18. Since many families buy the life insurance with the goal of providing for their children, they name their children as the beneficiaries of the insurance policy. But is this the best way to handle it?
No, it’s not. If a minor is named as a beneficiary of a policy, the child may not be able to access the money until reaching the age of majority. Some states require the insurance company to hold the life insurance proceeds, with interest, until the child legally becomes an adult. Other states may allow the life insurance funds to be dispersed to a court appointed guardian until the child becomes an adult. Also, all of the proceeds are turned over to the child at age 18, often putting a large sum of money in the hands of a child who is not ready to handle it.
Yet, many children who have lost one or both parents, need the funds immediately. In order to make sure that your children can access the needed proceeds of a life insurance policy, an estate planning attorney can recommend an appropriate option. One of the most popular estate planning tools is creating a trust for this purpose. A trust can name your children as beneficiaries with provisions that allow the trustee to distribute funds on behalf of your minor children. The proceeds of the trust may be transferred to your children when they reach an age that you specify.
Life insurance is a financial investment and a way for you to protect your family when you die. It is important that you protect your children by naming them as beneficiaries in a way that not only complies with laws of your state, but in a way that meets the specific needs of your family, and an estate planning attorney can work with you to discuss your options.