Every so often we encounter a client (the “Insured”) who has designated their young children (or child) as the direct beneficiaries of their life insurance policy (the “Policy”). Most commonly this occurs in the case of a single parent of minor children, because spouses, on the other hand, will typically name one another as the primary beneficiary, with the children as the contingent beneficiaries.
Problems can arise if the Insured dies before his or her minor beneficiaries reach 18. In such a case, the proceeds of the Policy must be paid to the Public Guardian and Trustee (the “PGT”), to be held until the child attains age 18. The PGT charges an administration fee every year that it holds funds, and the funds are not available to the child (or its guardian) during that time. Once the child attains age 18, the remainder is paid to the child, outright, as a lump sum of cash. For many parents, 18 (or even 21 for that matter) is considered too young to manage a significant sum of money.
One solution is to remove the child’s name as beneficiary under the Policy, and to instead have the funds flow to the Insured’s estate. The Insured can easily make, or update, their Will to include a testamentary trust for the child, to hold his or her inheritance (including these life insurance proceeds) on terms preferred by the Insured.
When the child/children are old enough such that receiving insurance funds outright is no longer a concern, the Insured can update the beneficiaries on the Policy to designate their adult children directly, which reduces the probate fees payable on the Insured’s estate, and may offer some creditor protection.
The preferable option will depend on the particular circumstances of the client, which should be reviewed with a professional estate advisor before a decision is made.