The premise of life insurance seems straightforward. You purchase a policy to provide peace of mind and financial protection to your loved ones, and then you get back to enjoying your life. Right?
Many people start thinking about life insurance when they have a child for the first time, so it may seem intuitive that policy is there chiefly to protect that baby.
But what happens if you have more kids? Should you change who your beneficiary should be? Is this something you should ideally plan for in advance, if you know you’ll want multiple children?
Divorce or infertility, twins and blended families can all change our family’s shape and timeline.
When you purchase a policy, you choose a life insurance beneficiary who will receive the payout if you pass away. You can generally change beneficiaries as needed once you have the policy, including setting multiple co-beneficiaries.
(If you have multiple beneficiaries, then they’d split the life insurance benefit according to a percentage you determine.)
This is important because families change over time, and your life insurance needs to keep up. A life insurance payout goes to the beneficiaries named on the policy, even if other documents like your last will and testament leave different instructions. That’s why it’s important that your policy reflects your current wishes and needs.
“Anytime family dynamics change, owners of a life insurance policy should review who the beneficiaries are and make any necessary changes,” says Mary Hale, manager of direct sales at Fabric’s insurance partner, Vantis Life.
Changing a beneficiary is free and generally fairly simple, such as completing a form. Often, you can do it online. (Fabric lets you update your beneficiaries online.)
So, how if at all should you rethink your beneficiary structure as your family grows?
Naming your spouse or partner as your beneficiary is one of the most straightforward and common choices for many families. Especially for blended families, though, it’s helpful to keep these ideas in mind:
You don’t need to be married to your partner to have them be an eligible beneficiary.
Because life insurance benefits will go to the beneficiary you designated regardless of what your will says, make sure you update the beneficiary if you divorce or separate and no longer want your former partner to be the beneficiary. A note in your will isn’t enough to make that update.
You can name both your current and former spouses as beneficiaries, which can be helpful if you are raising children with multiple partners.
Community property states may consider the life insurance to belong to you and your spouse, so you may need your spouse’s written approval to choose another beneficiary.
If your spouse or co-parent is your beneficiary, you probably don’t need to worry about updating your policy if you have another child with that same person.
One thing you probably don't want to do is to name your minor child as your life insurance beneficiary. Hale says, “When there are children under 18 listed as any type of beneficiary, a trust should be in place because death benefits are generally set aside until children become adults. Costs are associated with establishing trusts and most average, middle-market Americans don’t have one.”
While trusts have a reputation as being a tool for the super-rich, creating a trust fund can be a more accessible option than you might expect.
If you don’t have a trust and you name a minor as a life insurance beneficiary, it’ll take some time and expense for a court to designate a financial guardian for that child. You’ll likely save on time and stress for your family, and have more control, if you open a trust for your kids yourself.
If you do open a trust, you’d follow the trust’s specifications on whether to name each of your children to inherit or set a more general designation (e.g. “divide funds evenly between children”).
If your children are old enough to inherit property, you can name them outright as beneficiaries. Check your state laws and your insurance policy guidelines for the eligible age to be a beneficiary on your policy. If you go this route, you’ll need to name each child on the policy individually to ensure everyone gets a share.
In some cases, you may choose to set up a trust for adult children even if they’re old enough to inherit. For example, a life insurance payout could negatively impact financial aid at college.
Another option is to leave instructions on the life insurance policy to follow your will instead of naming a beneficiary directly. This can be helpful if your wishes are more complex.
For example, maybe you want to divide a death benefit between your adult children, but if one child passes away before you, you want their share to go to any children they have rather than your other adult children. In a case like that, it could be easier to specify the details in a will than on a life insurance beneficiary form.
An important note: Not all insurance companies are prepared to accommodate an instruction to “follow the will” instead of directly naming a beneficiary. You should reach out to your insurance provider to check whether this is an option and confirm that your beneficiary plan is set up appropriately.
An estate planning attorney can be one of your best resources to help tackle more complicated plans to help you make sure your wishes are clear to your loved ones.
When you wrote your will, you may have named someone as a legal guardian to take care of your children. (Haven’t written a will yet? It’s easy and quick to write a will online.) In some situations, it may feel right to include that guardian as a beneficiary.
If you’re not interested in or able to set up a trust for your kids, Hale says, “My recommendation would be to list the spouse as the primary and the guardian, should both parents pass, as the contingent. This way the guardian can financially provide for the children.”
You probably won’t be able to name your children as beneficiaries on the life insurance policy itself if they’re minors. If you direct the policy to go through your will, and your will names minors to inherit, the probate court has to step in and appoint a financial guardian or trustee to manage the funds until the kids are of age.
Courts can choose the same person to be legal guardian for your child and financial guardian for their inheritance, but they don’t have to.
The court may also set restrictions on how people can and can’t spend the funds. If you intended for the life insurance benefit to be used to care for your children while they’re still minors, but the court puts the money into a trust for your kids to receive once they’re adults, then things aren’t working out the way you planned.
The idea behind naming the guardian as your contingent beneficiary is this: You’d trust your children’s surviving parent to make financial choices that are in the kids’ best interest. So, similarly, you’d extend the same trust to the guardian you’d choose to care for them, too.
That said, naming your preferred guardian as beneficiary isn’t the same as naming your child’s parent. A parent automatically has a legal and moral obligation to care for their children. If your intended guardian is a beneficiary, the life insurance payout legally belongs to them even if, for whatever reason, they don’t end up becoming your child’s guardian after all. Going this route means taking the risk that your beneficiary won’t use all (or any) of the money on your children.
If you set up a trust, you can specify how people can use the funds. You can set terms for money to go toward fun or enriching things like summer camps or school tuition, or even allow money to go toward your child’s general care.
People outside your spouse and kids may rely on you to help provide for them. Maybe you’ve planned to chip in for a younger sibling’s college tuition or you’re financially providing for your parents’ care. When you’re shopping for life insurance, make a list of everyone you support so you can calculate your life insurance coverage needs and include all the beneficiaries you want.
No matter how carefully you plan, life can still throw new surprises your way. For example, a couple with a 4-year-old and 2-year-old might decide a 20-year term is reasonable to cover the family until the kids graduate college.
So what happens if, six years later, baby number three comes around? Or twins? Even if your family grows exactly as you planned, it can still feel awkward to figure out what policy makes the most sense with your kids’ age gap.
In some cases, no matter how creatively you structure your beneficiaries, your needs change. Here are a few options to adapt coverage as smoothly as possible as your family grows.
If you already have a life insurance provider, it can be worthwhile to ask if you can adjust your policy’s terms, such as coverage amount, upward or downward. Families planning to support multiple kids may expect to increase coverage over time, but the reverse happens, too. If you bought a huge policy because you planned on having five kids, but you end up with two, you might want to adjust down so you’re not paying for more coverage than you need.
NOTE: If you have a term life insurance policy through Fabric, you may adjust your coverage amount downward after purchasing the policy, but currently you cannot increase your coverage amount after you have applied or purchased.
Life insurance tends to get more expensive as you get older. If your current life insurance provider will give you new rates based on your existing policy, you might save some money compared to looking for a fully new policy. If the insurance provider will let you skip health checks or other steps in a new application process, it may also be more convenient to expand your existing policy.
The big question is whether your policy allows these kinds of changes. Many term life policies don’t offer coverage changes, or only under specific conditions. There’s no harm in asking, but be prepared to hear a no.
Buying multiple insurance policies that stagger expiration dates is called laddering.
Laddering can feel complicated at first, since you’re paying for multiple policies. That said, this approach can be more cost-effective than getting one large policy, because older policies expire (and take the premiums with them) as you phase out of needing that coverage.
Note that not all insurance providers support buying multiple policies, which is required for laddering. If you have term life insurance through Fabric, you may only have one active policy.
Most of the time, adding a smaller policy to fill coverage gaps makes more sense than canceling your existing policy and beginning the application process all over again. That’s because premium rates tend to increase with age. You’ll have to go through the application process for the new policy, whereas you’re locked into a rate with your current policy that may be lower than what you’d qualify for now.
But it’s also possible that your existing policy doesn’t match at all with what you need. Your income, family size and financial commitments may have ended up way higher (or lower) than you thought. In that case, you might compare costs to see if a supplemental policy or a fresh start makes the most sense for your situation.
Figuring out life insurance when you have a large family, or don’t even know your true family size yet, can be tough. The good news is most policies have room to handle some nuanced beneficiary setups, and you can make changes whenever you need to. And if your life insurance coverage needs to grow with your family, there are strategies to make that work, too.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.
Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.
Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.
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