It's common for married couples to automatically designate each other as primary beneficiary of their life insurance death benefit with their children as contingent beneficiaries. They do so assuming that if one spouse was to die, the money would go to the surviving spouse but if they both die simultaneously, the benefits will pass on to their children. Unfortunately, several problems can arise with this arrangement.
First, when both you and your spouse are in an accident where you die first while your wife dies a short time after you - perhaps a day or a month - a problem occurs. Because your spouse survived you, the death benefit goes to her and not to your contingent beneficiaries. Those benefit proceeds wind up in her probate estate - subject to creditor claims, fees, taxes and delays.
Second, if you both die simultaneously, another problem occurs. You think that your life insurance benefits both go to the children since they're contingent beneficiaries. But if the children are young, state law prevents life insurance proceeds going directly to them until they reach an age of majority that varies somewhat with the state you live in. Those death benefit proceeds would go to the guardian of the children for his or her use in caring for your children.
But if you didn't designate a guardian in your will, or had no will at all, the state would choose who the guardian will be for your children and pay the death benefit to him or her. You state's choice of guardian may not have been yours. And that may jeopardize just how your kids make out getting the full benefit of your life insurance proceeds
Another problem can occur when only you - perhaps the wife - dies and your husband survives. He'll get your death benefit since he's primary beneficiary. Your intention was that he and your children should reap those benefits.
But, perhaps later, he remarries and invests much or all that benefit into a house with his new wife. Perhaps everything will remain alright. But if he ends up getting a divorce from her, it's quite common for the new ex-wife to get the house in a divorce settlement or trial. So, in that case, the life insurance benefit you and your spouse calculated to benefit your family and for which you paid the premiums ends up benefiting a complete stranger to you with none of it left even for your children.
You can see that circumstances can occur that completely change what you intended to happen with the death benefits for which you paid life insurance premiums over many years. Becoming aware of such possibilities will help you to arrange your insurance beneficiary designations in a way that will fulfill you wishes. And those wishes are best assured with the use of trusts.
by: Shane Flait