Life insurance is an important consideration for any parent, particularly if the parent is the primary wage earner. If a parent passes away, life insurance can provide a source of financial support to replace the deceased parent’s income. Also, because the odds are low of an individual passing away in his or her 30’s or 40’s, life insurance can be quite affordable.
When an individual purchases a life insurance policy, beneficiaries must be named. A parent should avoid naming the child or the child’s potential guardian as the beneficiary of the policy. Ideally, the beneficiary of the policy should be a trust established for the benefit of the child. If the child is the beneficiary of the policy, a court will appoint a conservator to be responsible for the money. If a conservator is appointed, this will be costly and time intensive. In addition, the life insurance proceeds will likely destroy the child’s ability to receive need-based financial aid when attending college.
Please keep in mind that if an individual passes away in Oregon with an estate in excess of $1,000,000, the amount in excess of $1,000,000 is subject to the Oregon Estate Transfer Tax. Life insurance proceeds are included in determining the amount subject to this tax. For example, if an unmarried parent has a house with $200,000 in equity and the parent also purchases a life insurance policy with a $2,000,000 benefit amount, the parent would have a gross estate of $2,200,000. If the parent passed away, $1,200,000 would be subject to the Oregon Estate Transfer Tax because $1,000,000 would pass free of the Oregon Estate Transfer Tax. However, the remaining $1,200,000 would be subject to this tax. This means that the Oregon Department of Revenue would receive over $120,000 in taxes from the estate. To avoid this tax, people will oftentimes create an irrevocable life insurance trust that will own the policy, rather than the parent. In the situation mentioned above, if an irrevocable life insurance trust owned the policy and the child was a beneficiary of the trust, then no tax would be imposed if the parent passed away.