Life Insurance

It’s a Matter of “Trust” 

When considering a legal separation or divorce, many people change the beneficiary on their life insurance policies from their soon-to-be former spouse to their children. While this may seem like a good idea at the time, that may not be the case. Here’s why.

If your children are less than eighteen years old any money from your life insurance policy will be placed in a guardian account for their benefit upon your death. Those funds will then be released to them when they turn eighteen!

While I am sure there are some children who would use the funds appropriately, many are likely to purchase cars, toys and other “fun” items before funding a college education. In addition, having the money available may make it difficult to secure scholarships, grants and other college aid.

Instead of naming your children as the beneficiary of your life insurance, it might be wise to have a will drafted that contains a trust and have the insurance proceeds paid into that trust. This allows you to determine who receives the funds and, most importantly, when and how they will receive them.

For example, you can state in your trust that your children can only have access to the money for specific designated expenses such as education, medical, food and clothing, or any other expenses you deem appropriate. In addition, you can withhold distribution of the remainder of their funds until they complete their education or reach a specific age, such as twenty-two or twenty-five.

There is nothing wrong with continuing to name your former spouse as the beneficiary if you feel he or she will use the funds appropriately. However, if you have a concern about this setting up a trust and having your life insurance paid into that trust may be a better option than leaving the money directly to your children.