Life Insurance can be structured like a Will
- Explaining that a life insurance declaration can be used to determine how the proceeds of life insurance are dealt with in the same way that a will determines how your estate is dealt with.
- Questions the use of life insurance as a fix for the problem of your spouse’s future relationships and children impacting on your own children benefiting from your estate.
Is life insurance a fix in estate planning?
A reader I’ll refer to as Barb e-mailed feedback to my last column: “She should buy a life insurance policy and leave it to her children. Money in trust until a certain age.”
I had written about a young wife and mother who asked how she could ensure that wealth she helped create would go to her children after she died, not to her husband’s future spouse and children.
She and her husband are in their 30s. If she were to die today, she would want her husband to find another life partner. There is a high likelihood of additional children arising from that new relationship.
If she does the traditional estate planning thing and leaves everything to her husband, the claims of her children to the wealth she helped create will be diluted by claims of the new spouse and children.
I offered a solution that would leave the wife’s share of the home in the hands of her husband for his lifetime, and then to their children on his death.
Barb’s suggestion is for the young wife and mother to use life insurance to create a separate, additional amount of wealth on her death, and to leave that additional wealth solely to the children.
Arguably, if the children end up with a million dollars of life insurance, it doesn’t matter that the million dollars of wealth the wife helped create goes to a new spouse and children.
I’m not so sure.
The couple might choose life insurance as a tool to ensure that when one of them dies, the other of them can maintain the same standard of living.
A life insurance payout can eliminate their mortgage, erasing the monthly mortgage payment. And can provide additional funds to make up for the loss of the deceased spouse’s income.
But putting their hard-earned money into life insurance premiums to create a significant death benefit to be kept in a trust fund for their children side-steps the issue the young wife and mother raised.
She wants the wealth she helped create to end up going to her kids after her husband eventually dies, not to some future spouse or other children.
I might well be wrong, though. Barb’s life insurance idea might be exactly what the young wife and mother would want to put in place. If so, is it even possible?
Can you get life insurance for children where the proceeds are held in trust until the children reach an age when you’d want them to receive it?
Absolutely.
You can structure your life insurance to work in the same ways your will can be structured.
A typical will has clauses that provide that a young person’s share of your estate is held in trust until the young person reaches a certain age. Most folks consulting with me would like young beneficiaries to wait until age 25 before they receive their inheritance.
Those will-type terms can be imposed on life insurance proceeds.
Are you a grandparent who wants your grandchildren to receive the proceeds of your life insurance, but you don’t want them receiving a giant sum of money before they can handle it?
You can name your son or daughter (or whomever else you want) as trustee and include whatever trust terms you wish.
How?
You make what’s referred to as a “declaration” as defined in Part 3 of British Columbia’s Insurance Act.
An insurance declaration looks, walks and talks like a will. It can have very similar clauses. But it governs insurance proceeds that pass outside of the estate while a will governs wealth that passes through your estate.
