What to Consider Before Choosing a Beneficiary
If you're getting a term or whole life insurance policy primarily to provide for your child, you want to choose a beneficiary who has your child's best interests at heart. You need to carefully consider a party that will distribute your payout the way you want it to be distributed.
Sometimes, single parents want to name the child's future caregiver as the beneficiary. However, it's best to keep in mind that the caregiver is under no legal obligation to use the payout to pay for the child's care. Even when you name someone who will be taking care of your child as your beneficiary, they could very well use the payout in a way you never intended or would not have approved of.
Can I Name My Child as the Beneficiary?
To prevent the payout from being misspent, you might think about naming your child as the beneficiary. On the surface, it makes sense, but it may be complicated.
In some states, Term Life Insurance and Whole Life Insurance death benefits exceeding certain amounts may not be paid to minors. If your unexpected death occurs and your underage child is named as beneficiary, the person you designated as caregiver may be able to oversee the distribution of the payout under the Uniform Transfer to Minors Act1 in that state.
If you haven't designated a guardian for your child in the event you pass on, it's up to the courts to appoint a legal guardian for your child, who will then oversee payout distribution. This may be a person you are not comfortable with. When you take out a life insurance policy, it's crucial that you've though about who you want to be the legal guardian of your child or children.
Should I Name a Trust as the Beneficiary?
One way to protect the payout from your term or whole life insurance policy is to set up a trust. To do this, you'd work with an estate planning attorney to create a living trust or a testamentary trust. Your assets become part of a trust, which is managed by a trustee.
Once you've set up a trust, you can name that fund as the beneficiary for your term or whole life insurance payout. You direct how the money gets used, which ensures life insurance payout funds are then distributed according to your exact wishes.
With a trust, you can make sure your children receive financial care according to the terms of the trust you've created by designating a trustee to administer your benefits exactly how you want them to be.
Carefully Consider the Beneficiary
Term and whole life insurance plans are ideal to have in place so you can continue to provide for your children if you pass on. Naming the correct beneficiary guarantees your benefits are used the way you want them to be. Avoid pitfalls like:
- Naming your underage child as a beneficiary
- Not designating a legal guardian for your child before you take out a life insurance plan
- Naming a beneficiary who is not guaranteed to have your child's best interests in mind
If you're not confident about which person to name as a beneficiary who will manage your life insurance benefits, setting up a trust is good a way to protect your assets. This ensures your family receives the financial protection they need and that the you put into place is used exactly how you want.
If you're interested in life insurances for parents, contact AIG Direct today. You can get a free quote for term or whole life insurance in just a few minutes.