Did you know that you could be leaving your life insurance funds stranded in court limbo? If you have minor children, you picture the insurance funds as being the key to ensuring their comfort and future education. But there is a crucial step that your insurance agent can’t really help you with – and that is who to name as your beneficiary on that policy.
Fortunately, that is what this post is all about: what should you put down as your beneficiary for life insurance? There are several options, and we’ll look at them in turn.
Option 1: Name Your Children Directly
This is probably the biggest mistake you can make for minor children. When you do this, one of two things happen, neither of them ideal. One, the insurance company may delay payout of the funds until the child reaches age 18. In this case, the funds are protected, but they aren’t available for the benefit of the child either. Plus, do you really want to entrust all of those funds to an 18 year old? Or the insurance company may pay out the funds to a court controlled fund, leaving access to the funds in the courts hands. Imagine having to hire an attorney and file court paperwork every time your child needs new shoes.
Option 2: Name a “Custodian” of the funds
Under the California “Uniform Transfer to Minors Act” you can name a custodian of the funds. If you follow the guidelines carefully, you can even have the custodian maintain control of the funds until the child reaches age 25. Apart from choosing the custodian and picking an age between 18 and 25, however, you have no other options, for example, you couldn’t limit the use of the funds to educational purposes. And there is no protection from creditors once the child obtains the right to withdraw the funds.
Option 3: Name a Trust
When you create a trust, you have the most flexibility and control over when you children receive their money. Before they receive their money, the trustee is able to manage the funds, and use the funds for the benefit of the child – ensuring their needs are met, that their education is covered, and more. You can even add creditor and asset protection to the funds.
Using a trust as the designated beneficiary for your life insurance policy can spare your children from not having enough while they’re young, and having too much as they approach adulthood.
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