Protecting Your Family's Safety Net: How to Set Up Your Life Insurance Policy The Right Way

Life insurance is an important part of protecting your family, but if you don’t set it up the right way, there’s a good chance it won’t help your loved ones the way you want it to. Here’s what to do instead…

At our firm, we emphasize the importance of developing a robust strategy to enhance your life while safeguarding the future of your loved ones in your absence. While life insurance is a valuable tool for securing your family's financial well-being, its impact depends on the proper setup of your policy.

In this article, we delve into critical considerations regarding beneficiary designations in life insurance policies. Incorrectly naming beneficiaries can significantly affect the effectiveness, utilization, and control of the policy after your passing.

Avoid Designating Minors as Beneficiaries:

Selecting your child or grandchild as a direct or backup beneficiary may seem intuitive, but it can lead to undesirable consequences. If a minor is named as the beneficiary, it triggers a legal process called "guardianship" or "conservatorship," requiring the appointment of a guardian to manage the assets until the minor turns 18. At 18, the minor gains unrestricted access to the funds, exposing them to potential risks.

Naming a minor as a beneficiary may not convey the love and care you intend through life insurance. Instead, consider alternative approaches to ensure your children's well-being.

Avoid Direct Payouts to Adult Beneficiaries:

While straightforward, direct payouts to adult beneficiaries pose risks. Life circumstances change, and a lump sum received without proper management may be misused or depleted. Financially responsible beneficiaries are not immune to unforeseen events such as divorce or lawsuits, putting the entire amount at risk.

The Right Way: Utilize a Trust:

Often, it’s best to opt for a Trust as the beneficiary of your life insurance policy. A Trust allows you to appoint a Trustee to manage and distribute assets according to your specified rules. By bypassing direct beneficiary designations, a Trust provides control over fund utilization, preventing misuse and promoting responsible financial behavior.

A well-drafted Trust allows you to set conditions for fund distribution, considering the ages and circumstances of beneficiaries. It also bypasses probate, ensuring a timely distribution of funds. Additionally, the Trust structure can shield the inherited life insurance from potential legal challenges, divorces, or creditors.

Let Us Set Up Your Comprehensive Plan:

Properly configuring your life insurance policy involves careful consideration of family dynamics, financial goals, and long-term objectives. As a dedicated Life & Legacy Planning attorney, I am committed to guiding you through the creation of a comprehensive estate plan. Schedule a complimentary call with my office to learn more and ensure your wishes are fulfilled, providing enduring financial security and support for your loved ones.

This article is a service of W. Cory Hughes, 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™.