A comprehensive Life & Legacy Plan is about creating a strategy that lets you enjoy your life to the fullest while protecting your loved ones' future when you can no longer be there. It might seem like life insurance is an easy way to help secure your loved ones’ future – and it is – but your policy must be set up in the right way to have the best possible impact on your family.

The way you set up your beneficiary designations on your insurance policy can significantly impact its effectiveness, how it’s used, and who controls it after you die. In this blog, we'll explore how not to name beneficiaries on your life insurance and how to name beneficiaries to ensure your loved ones have the funds they need to thrive when something happens to you.

Naming your child or grandchild as a direct (or even backup) beneficiary of your life insurance policy may seem like a natural choice, but if you do that you’re guaranteeing a bad outcome for the people you love.

First of all, if a minor child is the beneficiary of a life insurance policy, it guarantees a court process called “guardianship” or “conservatorship” must occur to name a legal guardian or conservator to manage the assets for your minor beneficiary until they turn 18. Then, at 18, your minor child who is just barely an adult receives everything left in the account, outright, unprotected, with no oversight or guidance. This is the worst possible outcome for everyone involved.

If you are buying life insurance, you are doing it to make the life of your loved one’s better. We often say “insurance says I love you.” But naming a minor child as a beneficiary doesn’t say I love you; it says that you didn’t take the time to set your life insurance up the right way. You might think the answer is to name a trusted family member or friend as the beneficiary of your life insurance, hoping they’ll use the funds for your kids, but don’t do that!

If you name another adult as the beneficiary for a life insurance policy intended for your kids, your kids will have no legal right to the money – which means the adult you named as beneficiary can use the money however they want and don’t have to use it for your kids at all! 

So what’s the solution? Keep reading until the end to find out what to do instead.

Direct payouts to adult beneficiaries may seem straightforward, but can have unintended consequences. Life circumstances change, and the lump sum received from a life insurance policy might be at risk if not managed properly. By avoiding direct payouts, you can ensure that the financial security provided by the insurance is preserved for the long term.

One key concern is the potential for beneficiaries to hastily misuse or exhaust the funds. A sudden windfall might lead to imprudent spending, leaving your loved ones without the financial support you intended. Additionally, if your beneficiaries are not financially savvy, they may struggle to manage a lump sum effectively, meaning the policy might lose money over time.

Even if an adult beneficiary is financially responsible and savvy – or knows enough to speak to a financial advisor – life events can put the funds at risk. Because the life insurance proceeds now belong entirely to your beneficiaries in this case, the proceeds of the policy are now completely vulnerable to any future divorces or lawsuits that your beneficiary may go through in the future.

That means that if your beneficiary is divorced, sued, or accumulates debt, all the money they received from your insurance policy could be lost.

A Trust is an agreement you make with a person or an institution you choose. This person is called your Trustee, and their directive is to manage the assets you put into or leave to your Trust, according to the rules you create.

Instead of naming minors or adult loved ones as the direct beneficiaries of your life insurance, name your Trust as the beneficiary of your policy instead. By doing this, your loved ones will still receive the funds you intend for them while maintaining control over how the funds are managed and distributed. This ensures that your wishes for your assets and your loved ones are carried out even after you're gone. 

How does it work?

A well-drafted Trust allows you to specify conditions for distributing the Trust funds, ensuring that the funds are used for intended purposes such as your beneficiaries’ education, homeownership, or other specific needs. Distributions from the Trust can also depend on the ages and circumstances of each beneficiary. This level of control can prevent the misuse of funds and promote responsible financial behavior for everyone involved. Plus, assets held in a Trust bypass the probate process, ensuring a more efficient and timely distribution of funds to your beneficiaries. This can be crucial in providing immediate financial support to your loved ones when they need it the most.

And while you can choose to have your Trustee distribute life insurance proceeds directly out to your beneficiaries outright, at specific ages and stages, you may want to provide even more protection for your beneficiaries. One of the considerations we’ll help you make is whether to retain the assets in trust, giving your beneficiaries control over the Trust assets, but in a manner that keeps the inherited life insurance protected from lawsuits, future divorces, and creditors.

Setting up your life insurance policy with the right beneficiaries involves careful consideration of your unique family dynamics, financial goals, and long-term objectives while being proactive to avoid future issues. By doing so, you maximize the benefits of your life insurance to provide a lasting legacy of financial security and support for your loved ones.

But planning for your life insurance is only one step in creating a plan for everything you own and everyone you love today and in the future. As your Personal Family Lawyer, my mission is to guide you to create a comprehensive estate plan, which I call a Life & Legacy Plan, that ensures your wishes are fulfilled and your family's future is protected no matter what the future holds.

Schedule a complimentary call with my office to learn more.

This article is a service of a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

If you're looking to collect life insurance proceeds as the policy’s beneficiary, the process is fairly simple. However, during the emotional period immediately following a loved one’s death, it can feel as if your entire world is falling apart, so it’s helpful to understand exactly what steps you need to take to access the insurance funds as quickly and easily as possible.

Not to mention, if you’ve been dependent on the person who died for financial support and/or you are responsible for paying for the funeral or other expenses, the need to access insurance money can be downright urgent. Plus, unlike other assets, an estate’s executor typically isn’t involved with collecting life insurance proceeds, since benefits pass directly to a beneficiary, so this is something you will need to handle yourself.

With this in mind, we’ve outlined the typical procedure for claiming and collecting life insurance proceeds, along with discussing how beneficiaries can deal with common hiccups in the process. However, because all life insurance policies are different and some involve more complexities than others, consult with us, your Personal Family Lawyer® if you need any support or guidance.

Death benefits are not automatically paid out from a life insurance policy. In order to collect the proceeds, you must first file a claim with the life insurance company. But before you start the claims process, you must first identify the beneficiary of the policy: are you the beneficiary, or is the policy set up to be paid to a trust?

We often recommend that life insurance proceeds be paid to a trust, not outright to a beneficiary. This way, the life insurance proceeds are protected from lawsuits, creditors, and even a divorce that a beneficiary may be involved with at the time they collect the funds.

In the event a trust is the beneficiary, contact us, your Personal Family Lawyer®, so we can create a certificate of trust that you (or the trustee, if the trustee is someone other than you) can send to the life insurance company, along with a death certificate, when it becomes available.

In any case, you (or the trustee) will notify the insurance company of the policyholder’s death, either by contacting a local agent or by following the instructions on the insurance company’s website. If the policy was provided through an employer, you may need to contact the insured’s workplace first, so they can put you in touch with the appropriate insurance representative.

Many insurance companies allow you to report the death over the phone or by sending in a simple form and do not require the actual death certificate at this stage. Depending on the cause of death, it can sometimes take weeks for the death certificate to be available, so this simplified reporting option can dramatically speed up the process.

From there, the insurance company typically sends the beneficiary more detailed forms to fill out, along with further instructions about how to proceed. Some of the information you’re likely to be asked to provide during the claims process include the insured’s date of birth, date and place of death, their Social Security number, marital status, address, as well as other personal data.

Your state’s vital records office creates the death certificate, and it will either send the certificate directly to you or route it through your funeral/mortuary provider. Once you’ve received a certified copy of the death certificate, you’ll need to send it to the insurance company, along with all of the other forms the insurance company requires you to complete.

If more than one adult beneficiary was named, each person should provide his or her own signed and notarized claim form. If any of the primary beneficiaries died before the policyholder, an alternate/contingent beneficiary can claim the proceeds. In that case, however, he or she will need to send in the death certificates of both the policyholder and the primary beneficiary.

Although policyholders are free to name anyone as a beneficiary, when minor children are named, it creates serious complications, since insurance companies will not allow a minor to receive life insurance benefits directly until they reach the age of majority, which varies between states—in some it’s 18, and others it’s 21.

If a minor child is named as a beneficiary, you would need to go to court to be named as the child's legal guardian in order to manage the funds until the child comes of age—and this is the case even if you’re the child’s natural parent. This is because unless you are specifically named as the guardian of the minor’s estate, you are not automatically considered the guardian of the child’s financial assets, even as their parent.

This is why you should never name a minor child as a life insurance beneficiary, even as a backup to the primary beneficiary. Rather than naming a minor as the beneficiary, it’s often better to set up a trust to receive the proceeds. In that case, the proceeds are paid into the trust, and whomever is named as trustee will collect the insurance proceeds and manage the funds for the child’s benefit until he or she comes of age.

Moreover, within the terms of the trust, you can also spell out exactly how you’d like the trustee to manage the money for the child and even how the child can use the funds once they’ve reached adulthood.

In any case, you should consult with us, your Personal Family Lawyer® to determine the best options for passing on your life insurance benefits and other assets to minor children.

Provided you fill out the forms properly and include a certified copy of the death certificate, insurance companies typically pay out life insurance claims fairly quickly. In fact, some claims are paid within one to two weeks of the start of the process, and rarely do claims take more than 60 days to be paid. Most insurance companies will offer you the option to collect the proceeds via a mailed check or transfer the funds electronically directly to your account.

The payout of life insurance proceeds can be delayed for a number of reasons. Beneficiaries often face delays if the policyholder dies within two years of the policy being issued. This is due to the fact that most life insurance policies contain a contestability period.

Most contestability periods are typically between one to two years, and if the insured dies during this period, the insurance company can investigate the claim to ensure that the policyholder didn’t commit fraud on the policy application by lying about underlying health problems, family medical history, or other conditions.

That said, provided the insurance company doesn’t discover fraud or other issues with the application, it will most likely pay the claim once the investigation is wrapped up. If problems with the application are discovered, the insurance company might pay a reduced benefit or even deny the claim, depending on what is uncovered.

Payout may also be delayed when homicide is determined to be the insured’s cause of death and the beneficiary is a suspect. In this case, the payout is typically delayed until the beneficiary is cleared of any involvement in the insured’s death.

A few other common reasons insurance payouts may be delayed include:

• The insured committed suicide within two years of the policy being issued.
• The insured died during the course of illegal or criminal activity, such as a robbery or driving while intoxicated.
• The insured omitted risky activities, such as smoking or skydiving, on the policy application.

Sometimes an insurance company will request you to send in a completed W-9 form (Request for Taxpayer Identification Number and Certification) from the IRS in order to process a claim. Most of the time, a W-9 is requested if there is some question or issue with the records, such as having an address provided in a claim form that doesn’t match the one on file.

That said, a W-9 is simply a way for the insurance company to verify certain information in order to prevent fraud, so don’t be alarmed if you’re asked for one. This is a common verification practice, and it doesn’t automatically mean the company suspects you of fraud or plans to deny your claim.

While collecting life insurance proceeds is often a simple process, don’t hesitate to reach out to us if you have questions or need support in any way. As your Personal Family Lawyer®, we are here to ensure the process goes as smoothly as possible for you during what is likely to be an extremely trying time. Contact us today to learn more.

This article is a service of a Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

Life insurance is a key component of your family’s estate plan, offering those who depend on you for their financial security a safety net in the event of your death. Whether those dependents include your spouse, children, aging parents, business associates, or all of the above, investing in life insurance is a way to say “I love you” and make certain that when you pass away, the people you love will have a reliable source of financial support to count on.

Although purchasing life insurance may seem fairly straightforward, it can actually be quite complex, especially given all of the different types of coverage available. Plus, because insurance agents often earn hefty commissions on the policies they sell, it can be challenging to determine exactly how much coverage (and what type of insurance) you actually need—and who you can trust to give you objective and accurate advice about that coverage.

With this in mind, we’ll break down the common types of life insurance coverage, explain how each of the different types work, and outline what you need to know in order to purchase a policy that will adequately address your needs, objectives, and family situation. While you should always meet with your Personal Family Lawyer® to ensure you get the proper coverage, here are a few of the most important factors to consider when shopping for a life insurance policy.

Depending on the type and purpose of your coverage, a life insurance policy pays benefits to your family or business (whomever you choose as the beneficiary) in the event of your death. And while you don’t need it until you die, the earlier in life you purchase your policy, the less expensive your monthly or annual premiums will be. Of course, investing in life insurance early on also means that you’ll pay into the policy for a longer period of time.

By the same token, the healthier you are when you get life insurance, the less you’ll pay in premiums, because your policy is basically a bet between you and the insurance company about when you’ll die. The insurance carrier is betting they’ll be able to earn enough from the premiums you pay before you die, so that they’ll have received more than enough money to pay out the death benefit to your designated beneficiaries by the time you pass away. To that end, many carriers require a medical exam before you are issued a policy.

Life insurance comes in two main forms, which you can think of as permanent and non-permanent. With permanent coverage, such as whole life and universal life, as long as you pay the premiums, your insurance cannot be canceled, and your policy will be there and pay out when you die (unless you live longer than the guaranteed period).

With non-permanent coverage, known as term life insurance, you pay premiums over a certain number of years—usually 10, 20, or 30—and if you have not died during that period, the insurance ends, your premiums are gone, and no benefits are paid out when you die.

To determine which type of life insurance policy you should purchase for your family—permanent or term—you’ll need to consider a number of factors. When it comes to buying life insurance for your family, you will need to die with life insurance coverage in place if any of the following three scenarios apply:

1. You are likely to have dependents—minor children, a non-working spouse, or senior parents—who rely on you for their financial needs, and you will not have enough saved up at the time of your death to provide for their needs for the rest of their life.
2. You have a business that will need a cash infusion if you die to keep it running, until it can be sold or for your loved ones to buy out a business partner.
3. You will have an estate tax bill that you want to make sure is covered by life insurance so your family doesn’t have to sell assets to pay your estate taxes.

In each of these situations, you want to make sure you have either term life insurance that will continue long enough to cover your needs, or you’ll want to consider purchasing permanent coverage.

The coverage periods of term life policies can vary widely: 10, 15, 25, 30 years, or longer. Because your coverage expires after a certain number of years, term life insurance is much cheaper than permanent. Term policies are typically used by people who expect that they’ll only need the insurance for a certain period of time or for a certain purpose, but at some point in the future, they will no longer need the coverage.

For example, you might purchase term life coverage in order to pay off your home mortgage in the event you die before it’s paid off. Or you might have minor children, who rely on your income for their basic needs, and you need a term policy to ensure they have enough money to live on until they become financially independent should you die before they reach adulthood.

Permanent life insurance comes in several different forms, such as whole life, universal life, and variable universal life. And it’s mostly used for estate tax planning, very high-end income tax planning, and can also be used as key-person insurance, which pays out benefits if you fill a vital role in a company that would need cash upon your death to continue operating. As mentioned earlier, the various forms of permanent life insurance pay a death benefit whenever you die, no matter how long you live (unless the policy contract has a termination provision at a specific age).

Permanent life insurance policies typically have two components: the amount that goes toward paying for the life insurance, and the amount that builds up as an investment, called the “cash value” component. The cash value amount of your premium is invested tax-free, and depending on the policy, you may be able to use the cash value component in several ways: You can borrow against it throughout your lifetime (in which case you pay interest to the insurance company), you can take out cash withdrawals (in which case your death benefit would be reduced accordingly), or you can use it to pay future premiums.

There are some caveats to mention here: You often need to pay premiums on a permanent life insurance policy for 10 to 15 years before there is enough cash value to borrow against or use to pay premiums. If you access the cash value of your life insurance, you’ll reduce your death benefit, and you also may have to pay fees or taxes, depending on the policy and how much you take out. And if you withdraw too much, your coverage could terminate.

Keep in mind that life insurance is for providing your loved ones with a death benefit when you die, so you should always consult with us, your Personal Family Lawyer® and financial advisor before accessing the cash value funds.

When purchasing life insurance, you’ll want to make sure you have enough term life insurance to cover the expenses that your dependents will require until they are no longer dependents, or until you are certain that you will have enough money saved up to cover the lifetime needs of those dependents.

If you have children with special needs or a non-working spouse, they will require a longer period of care after your death, compared to a family with two incomes and children who will achieve their own independence in their late 20s or early 30s. To determine the right amount of term life insurance, consult with us, your Personal Family Lawyer® or a fee-only financial planner.

If you plan on staying in your business well beyond the typical retirement age, if you are an absolutely indispensable part of your company’s continued success, or you will have estate taxes to cover upon your death, you should consider permanent life insurance. In that case, you’ll want to consult with us, as your Personal Family Lawyer®, before you meet with an insurance agent to make certain you understand the terms of the policy you are buying and why you are buying it.

We all have unique assets, liabilities, and family situations, so there’s no way to know exactly what types and amounts of life insurance coverage your family needs without a full evaluation. Before you sit down with an insurance agent, meet with us, your Personal Family Lawyer® to identify the appropriate life insurance policy for your particular situation. Schedule your appointment today to get started.

This article is a service of a Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.