A Problem With Life Insurance

It’s pretty common for someone to buy a life insurance policy and make a minor child or grandchild the beneficiary.

English: $10,000 life insurance policy for Pre...

English: $10,000 life insurance policy for President James A. Garfield, the twentieth President of the United States. Discovered in a family scrap album dating from the late 1800’s. (Photo credit: Wikipedia)

Bad idea.

The reasoning is usually something along the lines of making sure the money goes with the kid, no matter where he ends up, but that money is mostly worthless until the kids grows up.   With the UGMA/UTMA (Universal Gift/Transfer to Minors Act) laws, depending on your state, it can be nearly impossible to access that money or use it for the support of the child.

  1. For example, in Minnesota, I would have to go through the following steps:
  2. Complete a Petition for Appointment of Guardian and Conservator with a $322 filing fee and request it be reviewed without a hearing.
  3. Notify any interested parties.
  4. Consent to and pay for a background study.
  5. Establish a custodial account at the bank and maintain separate accounting for the money.

That’s just to access the money.  As a conservator, I’d be able to use the money for “support, maintenance, and education”, but that does not include investing in a 529 college fund.   I could theoretically invest in ultra-conservative growth funds, but if the investments shrink, I could be on the hook for the difference.   I’d be a “conservator”, charged with conserving the asset.

After all of that, when the kid turns 18 (or 21 depending on the setup), the money is his to do with as he pleases.

Have you ever met an 18 year old who made really good decisions about money?   I had a friend who had a settlement trust pay her a lump sum at 18, 21, and 25.   Each time, she bought a new car and partied with her friends for a month before the money was gone.    That was nearly $100,000 down the drain.

It’s a much better idea to visit an attorney and set up a trust.  Make the trust the beneficiary of your life insurance policies.  Then, define who will be the trustee under what circumstances.   That way, you can make sure your kids and grandkids can actually be supported by your money.

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