Will Your Life Insurance be Used to Care for the Right People?

Your own mortality is always a hard subject with which to cope.  However, setting up your family, and especially your children, for dealing with a loss is essential.  While most parents will leave the money in their life insurance policies to their spouse for the benefit of their children, with the increase in divorce rates and the possibility of both parents passing, you must take a look at your insurance policy to be sure that your children will be taken care of.  If your children are adults at the time, then the money will pass to them as it would normally if they are named as the primary or contingent beneficiaries on the policy; but if the children are below the age of majority in their state, then you need to take action to ensure that the funds are used for their well being.

The age of majority is 18 throughout the US except in Alabama (19), Mississippi (21), Nebraska (19 or married), and Puerto Rico (21).  If a child is below this age at the time of death, then the parent has three options for making sure that the money is put aside for their child’s needs.  These options include designation of funds from the policy to the children themselves, to the parent’s estate, and to a trust fund.  Each has its own advantages and disadvantages, so you must look at your individual situation to make a decision on which method to use.

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The first option is to designate the children as beneficiaries.  If this option is chosen, then you should appoint a person whom you trust as guardian of your children’s estate in your will.  If one is not appointed, then a court will decide who the money from your policy is paid out to; some states, like Texas, will automatically appoint the children’s other natural parent, so be sure to know your state’s laws.  While some states may require yearly documentation describing what the funds have been used for, there are very few restrictions on how the money is used.  Due to this, it is imperative that the guardian have the best interest of your children in mind.  Upon reaching the age of majority, the child will be given control of the remaining funds.

The second option is to leave the money to your estate.  This will allow the money to be distributed as you see fit in your will.  Like the first option, if the child is not of age, then a guardian will have control of the finances until the child reaches the age of majority.  This option gives more flexibility for how the funds are distributed, but is taxed very heavily due to the large payments paid in a short period of time.  Guardianship of the children must also be determined in this case.

The final option gives you the most control over your policy funds, but is also the most expensive to set up.  This method involves setting up a trust, into which all of your policy payout will be paid, which will allow you to set aside a certain amount of the money for specific needs, like college tuition.  This also allows for the money to be paid out in smaller increments over a period of time up to the life expectancy of the child.  A result of this is that the money is taxed at a lower rate and can also be rolled directly into an IRA account for the child, further avoiding excessive taxation.

Your choice on how to handle your life insurance payout is an important one to consider should the worst occur.  Knowing that your children will be well taken care of is priceless and essential in providing peace of mind.

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