After some discussion with a client today I thought it was worth expanding the conversation. He had submitted an application for life insurance showing his wife and his two daughters, ages 1 and 3, as equal primary beneficiaries of a $1,000,000 policy.
His logic was that he wanted to make sure that all three had their needs taken care of, his wife for replacement of his lost income, and his daughters for schooling and as a legacy for them. We did decide, at the very least, that his wife should be the primary beneficiary for the benefit of their children, which he admitted made more sense than what he had submitted.
This prompted a discussion about how this was really the type of need that should be addressed not by splitting money in the beneficiary designation, but by creation of an irrevocable life insurance trust (ILIT) that would ensure that his wishes were carried out no matter what.
We talked about the what ifs that are inherent in this type of scenario. What if he and his wife die in a common accident? What if his parents whom he named as co-contingent beneficiaries didn’t agree with their deceased son’s desires for the childrens’ future? What if the grandparents divorced and only one of them kept their word to take care of the grandchildren? Who, or what instrument, keeps the wishes of the insured in place even when there is every opportunity for things to go wrong?
How can he make sure that his wishes about how the money was to be used as the children grew up was honored? How can he be sure that they were afforded the type of education he had anticipated and mad money available for was made available to them? How would money be distributed after they were through college? What if they didn’t go to college?
Bottom line. He made the right first move. This is a guy that took the initiative to buy life insurance, eons ahead of about half the men out there. But a little common sense and some questions need to follow. Ask all of those what if questions and then visit an estate planning attorney about setting up an ILIT.