For more than six years, I’ve shared my financial mistakes and successes on Money360. I know the information that’s out there can seem dense and impersonal to everyday consumers, and I started TSD because I wanted to change that. That’s why I’m excited to introduce a series of posts that will highlight one of TSD’s writers’ personal insurance nightmares and valuable lessons learned.
We’re kicking off the series with a funny and practical piece from Money360’s life insurance expert, Karla Lant. Be sure to check out her life insurance guide and some of the articles she’s written for Money360: here and here.
Feel free to share your experiences in the comments, or reach out to the writers via their info.
Today I’m going to tell you about the embarrassing and terrifying tale of my very first life policy. I made a major rookie mistake back then; if anything had happened to me, I would have left my daughter a real can of worms.
I had just received a new job complete with a salary and great benefits. I also purchased a life insurance policy using a discount available to me through my new workplace. I felt great! I knew I was making the necessary preparations, bolstering my family against the worst case scenario. I proudly named my one year old baby as the beneficiary of the policy.
At the time of the new job and the purchase of the policy, I was in the midst of a contentious divorce and custody battle for my child. She was about to turn one. I thought I was avoiding trouble by naming her as the beneficiary; I thought I was ensuring that the money would be hers alone.
But I was doing just the opposite.
Pitfalls of Naming Your Minor Child the Beneficiary of Your Life Insurance Policy
I was totally oblivious to the pitfalls of naming your minor child the beneficiary of a life insurance policy. If you want to ensure that your young child benefits from your policy, your work doesn’t end with filling her name into the policy’s blanks. You should also appoint a trusted adult to be the money’s guardian, or you could create a trust as beneficiary. Ignoring these options could lead to troubles you should have anticipated.
If you have a spouse who would be the child’s guardian in the event of your death, that person will have to petition the court to act as guardian to the money unless you appoint them now. This is especially true if you’re separated or in the process of getting a divorce. Always be specific and appoint someone else as guardian to the proceeds.
If I had died with my policy as it was, my one-year-old would have been the beneficiary of the $500,000 policy and her father would be administering it for her — but only once he applied to the court. I was in a contentious divorce with a spouse who had little knowledge of our finances, just as we had little knowledge of his, but he would have been administering my daughter’s money! If I had died before the divorce was handled, that’s what would have happened.
Incidentally, if neither parent is alive, the court will appoint a guardian for the money. Court-appointed guardians are not ideal. Entanglement with the court is expensive, intrusive and time-consuming. It’s also entirely possible that the guardian will make poor financial decisions, such as risky investments with the money. Remember, this person won’t have the same deep, personal stake in your child’s future you do.
And don’t forget, all of that money is going to fall into your child’s hands on their 18th birthday. I don’t know about you, but I think the odds of an eighteen-year-old wisely managing half a million dollars seem slim.
Best Practices for Making Sure Your Life Insurance Benefits Your Small Child
- If your intended beneficiary is a minor, it is a good idea to arrange for the money to go into a trust until that child is about 25 years old. While it is still in the trust, it can only be used for the specific purposes you designated when you set it up. No one else can use the money at all.
- If you have a spouse and they would make a good trustee, specifically designate them the trustee in advance. Remember, your marriage alone will not necessarily make them the trustee! You want to avoid having them petition the court for an appointment.
- Do what you can to avoid appointing more than one trustee. This almost always leads to problems. A better way to ensure the trust is being run according to your wishes is to be very specific when you create it.
- Along those lines, make sure you are specific when you set the terms of the trust. You need to be clear about what a trustee can and cannot do with that insurance money. If you don’t, even if the trustee is your choice, they may not be able to manage it the way you’d have liked.
You don’t have to be an insurance expert to handle your affairs like a pro
If you already have a life policy with your child as the beneficiary, don’t worry. It’s not too late. In most cases, you simply need to call the carrier and request a ‘Change of Beneficiary’ form. Hammer down the details with the trust and trustee. Complete and submit it, and you’re done.
You care enough to plan ahead for the well-being of your child, so make sure you’re really taking care of them in the best way. There’s no need to panic. You don’t have to be an insurance expert to handle your affairs like a pro. All you really need to know is where to look for help, and since you’re here reading this, you’re on your way. I told you my embarrassing story in the hopes that you will never have to tell it yourself!