You Have Life Insurance. Here’s What Your Family Actually Needs.

You purchased the policy when your first child was born. You selected a substantial amount, named your spouse as the beneficiary, set the premium to autopay, and felt a sense of relief knowing your family would be financially secure if something happened to you.

You took steps to safeguard your family. A life insurance beneficiary review honors that choice while prompting you to consider if the policy still aligns with the life you’ve built since then.

Now, a decade has passed.

Your income has changed. The mortgage has increased. You now have two children instead of one. Your previous policy still lists the same beneficiaries in the same manner, and no one has conducted a life insurance beneficiary review since you established your estate plan.

September is Life Insurance Awareness Month. It’s an opportune moment to ask more than just, “Do I have a policy?” A more insightful question is: “Will the funds go to the right individuals, at the right time, with the protection and guidance I originally intended?”

Evaluate Your Life Insurance Beneficiary Review Against the Current Situation

The policy was crafted based on a snapshot of your life.

Your family has continued to evolve.

A $500,000 death benefit might seem substantial. However, if your family needs to replace $100,000 in annual income, keep up with a $2,400 monthly mortgage, pay for childcare, and set aside funds for education, the situation changes quickly. Just five years of income replacement would deplete the entire policy before even considering the mortgage or childcare expenses.

Next, evaluate the policy based on how many years your family will require support. With a monthly mortgage payment of $2,400, five years would add up to another $144,000. If childcare costs $18,000 annually for each of your two children, three years would total $108,000. This means the initial $500,000 policy falls short by $252,000 before factoring in college expenses, final costs, or an emergency fund.

The amount is just one aspect of the assessment. We also need to consider any life changes since the policy was taken out, such as marriage, divorce, remarriage, having another child, taking on a parent’s care, starting a business, or establishing a trust.

Each of these changes impacts the intended purpose of the insurance funds.

This isn’t about finding a flawless figure. It’s about identifying the gap between the policy you purchased and the current responsibilities your family faces.

In summary: A policy designed for your past circumstances may not adequately support the future needs of your present family.

Simply Naming a Child Does Not Equate to Having a Financial Plan for the Funds

You might have named your child as the beneficiary because the policy is intended for them. This intention is clear, but the execution may not be as straightforward.

Typically, insurance companies do not pay out death benefits directly to minors. If there isn’t a suitable arrangement in place, a court-supervised process or a state-law custodial setup may dictate who oversees the funds and when the child gains access to them. This outcome might not align with the age, protections, or guidance you would have preferred.

Now, imagine an 18-year-old receiving the remaining balance of a $750,000 policy. The concern isn’t whether your child is financially savvy. The real question is whether anyone should be expected to manage such a significant sum while coping with the loss of a parent, especially without the support and structure you would have chosen.

A trust could be part of the solution, but simply having a “trust” isn’t sufficient. It needs to be tailored for the child, the beneficiary designation must be accurate, and the trustee should fully grasp their responsibilities. Additionally, the plan should clarify when funds can be utilized for housing, education, health, opportunities, and support, ensuring that your love doesn’t inadvertently turn into control from beyond the grave.

This review should also encompass a Kids Protection Plan, ensuring that the individuals responsible for your child’s care and those managing the funds are selected and coordinated, rather than relying on separate court processes. The insurance will help cover the care costs, while the plan specifies who can step in, what information they need, and how to keep your child’s life as stable and secure as possible.

In summary: Naming your child indicates to the insurer who the funds are intended for. However, planning is crucial to determine who will manage the money and what opportunities it can create.

A Trust Can Safeguard the Funds Only When All Elements Align

For one family, establishing a trust can safeguard the proceeds from a child’s divorce, creditors, lawsuits, addiction issues, or financial naivety. Conversely, another family might find that a direct designation is more suitable. The best choice hinges on the individuals involved rather than a one-size-fits-all solution.

Life insurance typically transfers according to the beneficiary designation specified in the policy. It does not automatically align with your will, and simply creating a trust does not mean the proceeds will be redirected into it. The form might still list an ex-spouse, exclude a child born later, refer to an outdated trust, or leave the contingent beneficiary section empty.

Generally, the IRS excludes life insurance proceeds received due to the death of the insured from the beneficiary’s gross income. However, this favorable treatment does not resolve the family’s dilemma. Someone must still determine who will receive the funds, who will manage them, and how they will benefit your loved ones.

When we discuss this with you, we consider questions that the beneficiary form cannot address:

How old will each child likely be when the policy is needed?

Who should make decisions while a child is still young?

Does a beneficiary have special needs or receive means-tested benefits?

Is this a blended family with conflicting responsibilities?

Should the funds be shielded from creditors or divorce?

What other assets and insurance will go to the same individual?

Who can execute your wishes with wisdom and care?

This is where tax, insurance, financial, and legal considerations intersect with real life. Your insurance professional can assist in evaluating the policy. Your financial advisor can project the funding requirements. Your tax advisor can identify potential tax implications. Our role is to maintain the family and legal context while those professionals perform their tasks, ensuring that all elements convey a cohesive narrative.

In summary: A trust is only beneficial when the policy, trust terms, trustee, and family objectives are intentionally aligned.

What the Policy Aims to Safeguard

Life insurance is frequently referred to as a death benefit. However, we view it as a decision of stewardship made during your lifetime.

The funds can provide your spouse with the necessary time to mourn before making any financial choices. It can help keep your children in their familiar home and school environment.

Additionally, it may enable a caregiver to cut back on work hours, support college education without incurring debt, or prevent the forced sale of a family business.

These outcomes represent the true purpose of the policy, which serves as one method of funding.

This is also why it’s crucial for your family not to stumble upon the policy by chance. Someone should be aware of the insurance carrier, policy number, owner, insured individual, beneficiaries, and the location of current records. If premiums are no longer being paid or if there have been changes to the policy, that information needs to be communicated as well.

In summary: Effective stewardship links the funds to the life you wish to safeguard.

Understanding the Complete Picture

This is the gap we assist you in bridging before a crisis through a continuous relationship. We evaluate the policy alongside your trust, beneficiary designations, family situation, financial overview, and the values that the money is intended to uphold. We do not replace your insurance or financial advisors. Instead, we ensure that the legal and family aspects remain aligned with their work.

The relationship is also significant in the moment. When you pass away, your family shouldn’t have to sift through old emails, wonder which policy is active, or meet a lawyer who has never interacted with you. Thanks to our ongoing relationship, your family has someone who understands the plan, knows the individuals involved, and can assist the advisory team in working from the same understanding.

The key takeaway: The policy provides funds. The relationship enables your family to implement the plan you established around it.

Life & Legacy Planning Session: What You Can Do Right Now

Gather the current beneficiary confirmation for each life insurance policy you possess. Identify the primary beneficiary, contingent beneficiary, policy amount, and policy owner.

Then pause before making any changes.

A beneficiary form cannot inform you if the trust is set up to receive the proceeds, if the designation employs the correct legal terminology, if the ownership has tax or planning implications, or if the outcome aligns with your family’s current situation. Bring the confirmation to your planning session for it to be assessed alongside your trust, assets, family dynamics, and the individuals you have selected.

We assist you in developing a Life & Legacy Plan that integrates your insurance, assets, legal instruments, trusted individuals, and the future you envision for your family. The relationship continues beyond the signing of documents. When something occurs, your family knows to reach out to us.

Schedule a complimentary 15-minute consultation to learn more.

This article is a service of Kristen Wong of Seasons Estate Planning, APC, 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™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.