Separation and divorce are compelling and often complex reasons for couples to reassess. Some are emotional, some rational, and some mostly financial. And some are all three. Estate planning falls into this last category. For many of us, it is difficult to discuss, let alone plan, the day when we will be gone. But we have to plan, especially when we have underage children who depend on us for their financial survival.
Life insurance is a must for parents
Many financial advisors place life insurance high on the list of conservative investments that should be included in a long-term financial plan. Life insurance can be divided into two basic types: permanent life insurance and term life insurance.
While it won’t impress you with big, flashy profits in the short term, permanent life insurance instills discipline in policyholders. It helps them to save consistently as it increases in value moderately. Permanent life insurance is usually more expensive than a term. Term life insurance is often the first type new parents buy. It doesn’t increase in value over time, but it is generally cheap to buy when we are young. More importantly, it protects the people who are financially dependent on us should the worst happen. The best life insurance policy for you and your family will depend on many factors, including your stage of life, financial support and investment goals.
How does divorce change our life insurance needs?
Both long-term and term life insurance pay a death benefit. And both require policyholders to designate a beneficiary – the person (or people) who will receive the proceeds of the death benefit. Many married couples name their spouse as a beneficiary regardless of whether or not they have children. But when we get divorced, our thinking about the beneficiaries naturally changes. Divorce has a way of undermining trust – or maybe the other way around. In any case, once you’ve named your ex as a beneficiary of your life insurance, you should probably consider naming a new one. In this way you can assure that only your children will benefit from the proceeds.
Can’t I just name my kids?
You can. Designating a beneficiary in your policy is critical. The proceeds of a policy without a named beneficiary end up in the no man’s land called estate. Depending on the size of the estate, the estate examination may take some time. Six to nine months is average. However, it can take longer, especially if a testator has no legal will. By the way, that’s a good argument that you have a will. It is best to have yourself prepared professionally. Ambiguity in a will can also trigger probate proceedings.
However, just making a will and naming a policyholder does not ensure that your children have immediate access to the funds they need for good care. Children cannot legally own large sums of money – whether from life insurance proceeds or inherited property – until they reach the age of majority. The law recognizes that minors do not have the wisdom or maturity to manage finances. Of course, most parents see it that way too. That’s when you name your children’s guardian and hire a restorer to take responsibility for your estate.
The difference between guards and conservators
Many parents name a guardian in their will – the person their children will live with after they die. Few decisions we make in life are so momentous. If you are divorced, your ex-spouse may be your children’s guardian by default, especially if you are raising your children under joint custody. Legal guardians must be recognized by the courts. Judges usually accept a deceased parent’s decision on guardianship. However, you can also opt out of your choice if you name someone who you think may not be able to raise your children well.
Guardians are not the same as restorers. Here’s an easy way to think about it: guardians make decisions about people and conservators make decisions about money. In some cases, a child’s guardian and the caregiver charged with overseeing that their assets are the same person. But there are certainly reasons why you might want to name two different people. For example, you could respect your sister’s values and enjoy her caring spirit. You know she would give your children a solid moral foundation and a loving home. But she has never been good with money and you fear that she will not be able to make important financial decisions wisely. So you decide to name one person to manage your kids and another to manage their money. Good idea.
Divorce is another reason you can appoint both a guardian and a restorer. Let’s take a look at some of the reasons for this.
Trust: a critical factor in estate planning
What do they have for lunch? What do you do with your smartphones? Why are their grades slipping? Loving parents care for their children every day and in every way. Knowing that someone is giving our children the same careful attention when we’re away is why we appoint guardians and conservators.
Unfortunately, a lack of trust is often the reason couples split up in the first place, and the divorce process can further undermine the trust we have in our ex-partner to “do the right thing”. Especially when it comes to money. Differences in attitudes towards financial matters and even a spouse’s history of irresponsible spending are another problem that often underlies the end of a marriage. Even if you are confident that your ex is raising your children the right way, you may not trust them that they are spending your child’s wealth wisely. If your ex has moved into a different relationship and has parenting and financial responsibility for someone else’s children, this can also raise questions. Assigning a restorer in addition to a guardian can alleviate your concerns in either case. Under a guardian / carer agreement, a guardian has day-to-day responsibility for looking after your children and recommending how your children’s assets should be spent. But a restorer oversees and has ultimate responsibility for financial decisions made on their behalf. Some parents specifically choose restorers based on their financial literacy, and that’s not a bad strategy.
Just do it
Parents have to make hard phone calls all the time. But it is especially difficult to think about your own death. Many parents put off estate planning decisions because of discomfort or inexperience. Don’t be one of them. Procrastination can have serious consequences for your children, including worsening the grief they are already experiencing. An estate planning attorney can walk you through some of the soul searches that you need to undertake. A spiritual advisor can do the same. And once they reach an age where they can understand the importance of your choices, don’t forget to talk to your children. Ultimately, what counts is your safety and happiness. You deserve to be part of the conversation.
Author’s Biography: Susan Doktor is a journalist, business strategist, and mother of twins. She writes on a wide range of topics including personal finance, legal affairs, and family life. Follow her on Twitter @branddoktor.
Photo by Jordan Whitt on Unsplash
Comments are closed.