Should I leave my life insurance to my kids? NO!
It’s said that every adult needs life insurance, especially when they are getting married so that they will continue to support the other should the worst come to pass. However many policyholders often outlive their marriage long before their partner.
Many of my divorcing clients think the easiest thing to do is to simply change their beneficiary designation from their spouse to their children, but leaving money directly to minors means they may be left without the funds needed for their care, which is the whole point of life insurance in the first place, right? So what should you do?
First, don’t change anything until all of your agreements are in place and legally documented. Making changes sooner could cause trouble if you are unable to mediate and end up in litigation.
Second, think about which option would work best for you and your children if you weren’t here. Consider your personal needs and the insurance you already take out. Do you have any disabilities? If you haven’t already, it is important to look into the different types of insurance (perhaps you can take a look at options here), to ensure you know what you, and ultimately your children, are entitled to. There are several choices.
Leave your former spouse as the beneficiary This, obviously, requires no effort on your part if you trust your former spouse to use the funds appropriately to care for the children. However, if your former spouse remarries and you die, and your former spouse subsequently dies, the funds would likely pass to the new spouse as a part of your former spouse’s estate.
Uniform Transfers to Minors Act A parent can establish an UTMA account for the minor through a bank, financial institution or insurance company, name it as the beneficiary of the life insurance policy funds, and name a custodian (often your former spouse who knows the needs of the children) who will manage the funds for the children until they reach emancipation at which time they gain complete control of the funds.
Establish a trust A trust allows for even more control. Written by an attorney, the trust can be named as the beneficiary of the life insurance policy and once funded, a trustee can be named (again, often the surviving parent), and trust language can define how funds are to be used and distributed, as well as the age at which your children will gain direct access to the funds. If you have a child with special needs, it is important to work with an attorney with experience in creating special needs trusts to ensure your child’s benefits are not negatively impacted by inheritance.
Finally, whatever you decide, be sure that your beneficiary designation on the policy itself aligns with your wishes. Simply indicating in your will what you want will not work and could cause delay and expense in carrying out your final wishes. And if you are putting all this time and effort into your life insurance, make sure you have the best policy you can! Canadians could visit policyme.com to compare the best insurance providers in the country.
Your mediator can help you and your spouse to talk through the many important decisions needed to be made when divorcing. For more information contact The Mediation Center at 585-244-2444 or email [email protected].