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Minor Children and Life Insurance

Written by Aaron Pinkston, Wed, Feb 10 2010

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You have kids that you’re responsible for and you did the right thing by getting life insurance to protect them (or maybe that’s why you’re here). Who should be the beneficiary of your life insurance policy – your children?

This is clearly a question for single parents, but it’s also one that couples have to think about too. Who would take care of your children if something happened to both of you at the same time? Certainly you’ve thought about a guardian and created a will. Now it’s time to think about your beneficiary designations too.

A quick note: While this website focuses on life insurance and obviously I’m talking about life insurance beneficiaries, you also have beneficiary designations on things like retirement plans and pensions. Take care of those too.

A likely scenario

Suppose you have in mind your sister will take care of your children in case you are not around to take care of them. Most people will wonder, should you make your children or your sister the beneficiary of your life insurance policy?

If you put your child down as beneficiary, who ever gets guardianship of him or her can use the money however they want to. If you put your sister down as beneficiary, she can use the money however she wants to, whether she takes guardianship of you’re your child or not.

Either way, your kids might not fully benefit from the money you left to help them be secure. Both of these solutions have problems. Pobably the safer of the two is to leave the money to your daughter. At least then she follows the money designed to take care of her. However, it can lead to arguments about guardianship (think Anna Nicole Smith). And who’s to say that future college fund doesn’t turn into a sports car or a gambling habit? You know your family better than any one else.

A trusty option

If you’re worried about how your sister (or whoever you name as guardian) might use the money in ways besides raising your children, you might consider setting up a trust. Then the issue of beneficiaries is easy. Just name the trust as beneficiary of your life insurance. Trusts have a lot more power and must be followed as they are written.

If the trustee of the trust ever abuses the life insurance money you left behind, there is a lot more legal leverage your friends and family members have to get the situation reviewed by a judge and fixed. On the other hand, accusing someone of being a poor guardian doesn’t carry much legal weight to take control of life insurance proceeds.

Talk to a layer in your area who is familiar with the laws of your state or province for more information. Many lawyers will meet with you initially before billing. And because they deal with these issues regularly, finding a reliable and affordable attorney should be easy.

Three beneficiary choices for life insurance

When you decide who should be the beneficiary of your life insurance, you have three options. You can leave it to:

  1. Your children’s planned guardian
  2. Your children or
  3. A trust for your children

It’s up to you to decide which is the right choice for you and your family. Talk it over and decide. The secret is to take action when you have minor children and life insurance.

By the way, if you don’t yet have life insurance or just want to compare the policy you have against what you could have gotten, start now to get quotes from multiple agents without any hassle. It’s easy, and most insurance agents can help you work through your beneficiary decisions too.