Life Insurance: Daughter's Payout Entitlement

Life insurance is a type of insurance contract. When you purchase a life insurance policy, you agree to pay premiums to keep your coverage in force. If you pass away, the life insurance company can pay out a death benefit to the person or persons you named as beneficiaries of the policy. The beneficiary is the person who will receive the payout from a life insurance policy if the insured person dies. The proceeds from the payout can be used to help pay for financial needs – those that come with death, such as funeral arrangements and other end-of-life expenses, along with day-to-day bills like the mortgage and childcare.

You can name two (or more) people as beneficiaries, outlining the percentage of the policy payout each would be given. You can also name a contingent beneficiary, who could receive the death benefit if something happened to the primary beneficiary.

When it comes to choosing a beneficiary, most people designate their spouse, significant other, children, or parents. However, you could name a sibling, a close friend, or even a trust as the beneficiary. When choosing your life insurance beneficiaries, you should consider where those funds would have the greatest impact in the event of your death.

Naming a minor as a beneficiary

While it is possible to name a minor as a beneficiary, it is not recommended. Minors cannot receive the death benefit directly and the process of appointing a custodian can take several months, during which time your child will not be able to access the funds.

If you want your minor child to be a beneficiary of your insurance policy, you could name your spouse, the child's other parent, or the child's guardian to receive the life insurance policy payout on the minor child's behalf.

If you prefer for your life insurance payout to go to your minor child, you need to set up a trust for them so they receive the benefit promptly and without having to pay taxes or legal fees.

• Setting up a trust for your child
• Designating a custodian
• Naming your current or former spouse
• Creating a trust and appointing a trustee

Setting up a trust

You can set up a revocable trust, also known as a living trust, to indicate who will receive your assets when you die. A trustee manages the trust and ensures the correct individuals receive their benefits in the event of your death. You can adjust which assets are in the trust and who the beneficiary is as your circumstances or wishes change.

You can also create an irrevocable life insurance trust if you’d like to reduce estate taxes and leave a larger inheritance for your loved ones. Unlike a revocable trust, an irrevocable trust cannot be adjusted after it is created, so think carefully before deciding how your money and assets will be distributed.

Designating a custodian

If you aren’t able to set up a trust for your minor child, you can name a custodian to help them claim and manage the death benefit. A custodian is responsible for claiming the death benefit on your child’s behalf and will manage the money until your child turns 18.

The custodian will be able to use the money if it’s in your child’s interest, like paying for tuition or necessities. If you choose this option, it’s important to name a custodian that you trust to act in your child’s best interest.

Naming your spouse as the policy’s beneficiary

If it makes sense for your family, name your spouse as the primary beneficiary and your trust as your contingent beneficiary. Your spouse can continue managing your household finances and set money aside for your child’s future. If you both pass away, the trust can take over.

Choosing a contingent beneficiary

• Relationship and financial needs: Consider the relationship of potential contingent beneficiaries to you and your primary beneficiary/ies. Think about their financial needs, and whether they would be able to benefit from the proceeds.
• Age and health: When selecting a contingent beneficiary, it is important to think about their age and health. This is especially important if you are choosing between multiple potential beneficiaries of a similar relationship to you.
• Multiple contingent beneficiaries: You can name multiple contingent beneficiaries and specify how the proceeds should be divided among them. This is a good option if you have a large number of people you would like to benefit from your policy or if you want to ensure that your proceeds are distributed according to your wishes.
• Regular review: It is important to review and update your life insurance policy, including your contingent beneficiary information, after any significant life events such as marriage, divorce, the birth of a child, or the death of a beneficiary. This ensures that your policy remains current and reflects your wishes.

Remember, the choice of a contingent beneficiary is a crucial step in the process of taking out a life insurance policy. By carefully considering your options and keeping your policy up to date, you can ensure that your proceeds are distributed smoothly and according to your wishes.

Primary vs. secondary beneficiaries

When you take out a life insurance policy, you can name one or more beneficiaries. These are the people or entities that will receive the cash benefit from your policy after you die.

Your primary beneficiary is first in line to receive your death benefit. If the primary beneficiary dies before you, a secondary or contingent beneficiary is next in line. You can also designate a final beneficiary in the event that both the primary and secondary beneficiaries die before you.

If you name your spouse as the primary beneficiary and your children as secondary beneficiaries, the children will only inherit assets if the spouse passes away before you or does not claim entitlement to those assets.

How to Choose a Beneficiary

This is a very personal decision. Some people want to use a death benefit to protect their loved ones, and others look at it as a financial transaction. Ask yourself: who will need extra money when you pass away? Are there people who depend on you for financial support? Who will bear certain expenses at your death?

You can name several people as your beneficiaries if you'd like, but you must then decide how you want the money to be split between them. Usually, the best way to divide the money is by percentage.

Rules and Regulations

• State or policy life insurance beneficiary rules may restrict who you can name as a beneficiary. For example, if you're married, your spouse may have to sign a waiver before you can name someone else as the beneficiary.
• In some states, beneficiaries who aren't relatives need to have an "insurable interest in your life" when you take out the policy. This means they could suffer financially if you were to die.
• If you don't name a beneficiary, the cash payout from your policy automatically becomes part of your "estate" and has to go through probate, a legal process that costs money and slows down how quickly the money gets to loved ones.
• In some states, money paid to your estate can be claimed by creditors.

Impact of divorce on beneficiary status

Divorce can have a significant impact on beneficiary status in life insurance policies, and it is important to review and update beneficiaries as part of the divorce process. Here are some key considerations:

• Updating beneficiaries: Most married individuals list their spouse as the primary beneficiary. After a divorce, individuals often want to remove their ex-spouse as the beneficiary and may wish to designate children or other family members instead. It is essential to contact the insurance company and make the necessary changes to reflect the new circumstances.
• Accounting for cash value: Whole life and universal life insurance policies accumulate cash value over time. In a divorce, the cash value of these policies may be considered a marital asset and subject to division. It is important to determine the cash value and decide how it will be divided between the spouses.
• Protecting alimony and child support: If one spouse has primary custody of the children and receives alimony or child support, it is crucial to maintain a life insurance policy on the ex-spouse. This ensures that, in the event of the paying spouse's death, the custodial spouse will continue to receive financial support for the children.
• Life insurance as a marital asset: In some states, life insurance policies purchased during the marriage may be considered marital property. In these cases, the policy and any accumulated cash value will be included in the division of assets during the divorce.
• Insurable interest: After a divorce, an individual may not be able to keep a life insurance policy on an ex-spouse, as they no longer have an "insurable interest". However, if there are financial interests, such as alimony or child support payments, maintaining a policy may be allowed with the ex-spouse's cooperation.
• Court-mandated life insurance: In some divorce cases, the court may order one or both spouses to purchase a life insurance policy as part of the settlement, especially if there are minor children involved. This ensures financial protection for the ex-spouse and children who depend on the higher-earning spouse's financial support.
• Revocation-upon-divorce laws: In certain states, there are revocation-upon-divorce laws that automatically remove an ex-spouse as a beneficiary after a divorce. However, this may not apply to group insurance policies governed by Federal ERISA statutes. It is important to review the specific laws in your state.
• Irrevocable beneficiaries: Some life insurance policies have irrevocable beneficiaries, which means that the policyholder cannot change the beneficiary without their consent. Even after a divorce, an ex-spouse as an irrevocable beneficiary would still have the right to a payout unless they agree to changes in the policy.

Changing beneficiaries

Changing the beneficiary of your life insurance policy is a straightforward process, but it's important to ensure your policy is up to date, especially after significant life events. Here are the steps to change beneficiaries and some reasons why you should keep your policy current:

• Contact your insurance company. The process may vary depending on the provider.
• Fill out a "Change of Beneficiary" form, which will include information such as the policyholder's name, the new beneficiary's name, and the reason for the change.
• Submit any required documentation. This may include identification forms or legal papers, especially if you're changing the beneficiary due to the previous beneficiary's death.
• Follow up with your insurance provider to confirm that the changes have been approved and are accurately reflected in your policy.

Reasons to Update Beneficiaries:

• Marriage or Divorce: If you get married, you may want to add your spouse as a primary beneficiary. In community property states, you may be required to name your spouse as a beneficiary. In the event of a divorce, you'll need to manually update your policy to remove your ex-spouse as a beneficiary unless you want them to remain eligible to receive benefits.
• Birth or Adoption of a Child: You may want to add your child as a beneficiary or contingent beneficiary. If you already have children listed as beneficiaries and they are now legally adults, you may want to update your policy to reflect this change.
• Death of a Beneficiary: If a beneficiary passes away, you'll need to name a new beneficiary to ensure your policy remains valid.
• New Estate Plan: If you create or modify your will or make other significant changes to your estate plan, you should review and update your beneficiary designations as necessary.
• Other Life Changes: Any significant life change that impacts your financial situation or personal relationships is a good reason to review and update your beneficiaries. This could include buying a home, taking out loans or mortgages, changing jobs, or experiencing the death of a loved one.

Remember that you can change your beneficiaries at any time, and it's essential to do so to ensure that your death benefit goes to the right people. Keeping your life insurance policy up to date will provide peace of mind for you and your loved ones.

Frequently asked questions