After you get married, have kids, or buy a house, you may realize that you need life insurance.  You may know that you want your family to be financially secure if something happens, and you know that you want to preserve the house and your spouse’s retirement.  You may also want to make sure that your children are taken care of, but can you name them as beneficiaries if they are not yet adults?  If you want the house to be paid off are you better naming the bank as your beneficiary, or your spouse?  How do you make sure that your grandchildren are taken care of?  If you are confused about who to name as your beneficiary, here is some help on common scenarios.

Paying Off A Mortgage

Some people may think that naming a bank as a beneficiary makes sense if you have an outstanding mortgage, but you should always name your spouse.  The biggest reason for this is that the principal balance on the mortgage will diminish over time, but on most life insurance policies (except specific reducing face mortgage life insurance policies) the life insurance benefit stays level or increases.  You always want to have the spouse as the beneficiary so that they can make the most logical decision as to paying down the mortgage given the current circumstances.  They may want to sell the house, or they may decide that it is more efficient to invest the money than to pay it towards the mortgage principal (which often results in fees for early payments).  Your spouse is inheriting the life insurance free of tax.  Assuming that they are able to make responsible decisions with the proceeds, they are best named as a beneficiary even if the intent of the insurance is to pay the mortgage.

Leaving Money For Children

It may make sense of the surface to name your children as beneficiaries of your life insurance policy if you wish to pass proceeds on to them.  If your children are minors though, this may present many problems.

Most states have laws in place which prevent children from taking possession of life insurance proceeds until they are adults.  This means that a guardian must be appointed to act as a caretaker of the money until the children reach the age of majority.  If a guardian isn’t appointed prior to the death of the insured, the next of kin must go through a legal process to appoint a guardian.  This process can take a lot of time, and cost a lot of money in legal fees and expenses.  Naming minors as beneficiaries directly is not usually a smart idea.  There are options to ensure that money does go to your children though.

The Uniform Transfer Of Minors Act

The Uniform Transfer Of Minors Act provides an efficient way for an adult to pass life insurance proceeds on to minors.  Commonly referred to as a UTMA account, the Uniform Transfers To Minors Act allows adults to set up accounts for their children at a financial institution or life insurance company.  The person setting up the account also names a custodian, who will be in charge of managing the account until the child reaches the age of majority, which is between 18 and 21 years of age depending upon the laws in the specific state where it is established.

The proceeds from the policy will fund the UTMA account, and the custodian will manage the money until the child reaches the age at which they take possession.  Setting up a UTMA account and using the UTMA account as the beneficiary to pass money on to the children is usually the least expensive and easiest way to pass the proceeds of a life insurance policy to children.

Funding A Trust

A life insurance trust can also be named as a beneficiary of a policy in situations where the owner is planning to pass on large sums of money to their heirs.  Depending upon how the trust document is written, the money in the trust can then be disbursed to children at specified times or ages.  Until the child is ready to take the money the trust is managed by a trustee, who is appointed in the trust document.  Funding a trust allows great control over how the money is managed and disbursed to the children or beneficiaries of the trust.

A trust can also pass the money onto a spouse, or other beneficiary(s).  Depending upon the size of your estate, a trust may have tax benefits.  A trust is also a good way to control how the money from your proceeds is ultimately used because an appointed trustee can release funds according to their discretion (and in accordance with the trust document created by the funding party).

Leaving Money To Future Generations

There are multiple ways to leave money to future generations, just like there is with children.  Leaving money to future generations can be complicated by unborn grandchildren and/or great-grandchildren.  Just like with children, a UTMA account can be set up for further generations from the insured person.  Another way to leave money to unborn beneficiaries is through a per stirpes arrangement.

Per Stirpes Arrangement

A per stirpes arrangement guarantees that each branch of a family receives an equal share of life insurance proceeds.  Each child of the insured is considered a “branch”.  For instance, f there are two children, each branch is entitled to a 50% share of the proceeds.  If both children are surviving when the claim is filed, the 50% allocation goes to them.  If one child has passed, and one is still living, but the living party has two children of their own, the surviving child of the insured person will receive 50% of the proceeds, and the surviving grandsons (children of the deceased child), are each entitled to a 25% share, or half of the 50% allocation which is guaranteed to that branch of the family.

If an entire branch of the family no longer exists, the proceeds that would have gone to that branch is divided equally among the other surviving branches.  If a new branch is added to a family after the policy is put in place, the proceeds will be divided equally to include the new branch.    Per stirpes is an excellent way to leave money generationally.

Trust and UTMA Account

Just like with children, trust and UTMA accounts can also be set up for grandchildren.  The proceeds of life insurance can fund these accounts, and the money will be distributed according to the trust document or legal requirements.

Retirement And Living Expenses For Spouse

Before naming anyone else as beneficiary, it is important to consider whether or not your spouse will be financially secure.  Chances are when a family loses an income-earning member the ability to save for retirement is greatly reduced.  Retirement is extremely expensive, and there are unknowns with the future rate of inflation and costs.  Always consider whether or not your spouse is likely to have enough money at their disposal to live comfortably before and during retirement before naming anyone else as a beneficiary.

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