Choosing a Life Insurance Beneficiary That is a Minor
One of the most important components of taking out a new life insurance policy is choosing a beneficiary. If you have children, you may consider them as your beneficiaries, but this can complicate the process. It’s important to know how the process works and what you need to consider, depending on your individual circumstances and where you live.
Purchasing life insurance is a smart choice as a parent so you can make sure your minor children are provided for if something happens to you. Raising a child can be expensive and the costs of college are astronomical, so it makes sense to ensure there is financial support so your kids can be cared for and have money to fund their education if something happened to you.
When parents decide to buy a life insurance policy, however, there’s an important decision to be made. The parent covered by the life insurance policy will need to determine who receives the death benefits—or the money the policy pays out after the parent’s death.
Naming an insurance beneficiary isn’t always easy when you want the money to be used to provide for a minor child because kids under 18 can’t access and manage the money until they reach adulthood.
There are multiple approaches parents can take to make sure the proceeds from a life insurance policy are used appropriately to provide for their kids. This article can help you to determine who should be named as the life insurance beneficiary when you have minor children—as well as what the implications are if your life insurance beneficiary is a minor.
Can You Name a Minor as Your Life Insurance Beneficiary?
As a parent, it is possible to name a minor as your primary beneficiary when you purchase a life insurance policy. However, a life insurance company won’t just give the insurance proceeds to the child when you pass on.
Typically, when you’ve named a minor as your beneficiary, the court appoints an adult custodian to handle the funds until the child reaches adulthood. This process can be very expensive, which means there is less money available from the proceeds of the life insurance policy to provide for your child.
Typically, when a guardian manages the funds left to a minor, the funds will be transferred to the child upon the child’s 18th or 21st birthday with no strings attached. This can also pose problems when a young adult is suddenly handed a large sum of money.
The specific rules for how a guardian is appointed and how the money is eventually transferred to a minor will vary by state, so you should check with your life insurer to find out exactly what will occur if you name an underaged child as your beneficiary.
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What Are the Benefits of Naming a Minor as Your Life Insurance Beneficiary?
Naming a minor child as your beneficiary on a life insurance policy does have a few advantages. For example:
- Your child will eventually have the freedom to use the money as needed. When the funds are eventually transferred to your son or daughter, your child can pay for educational costs, healthcare, or other life necessities.
- Your child will have greater use for the funds than other potential heirs. Your child is probably your financial dependent and isn’t self-supporting. Since your kids don’t have money of their own in most cases, they’re in need of funds to provide for them. Your life insurance policy proceeds can ensure they don’t struggle financially, especially when they become young adults.
If you choose to make your child the primary beneficiary on your life insurance policy, you might want to add a contingent beneficiary in case the original beneficiary dies or can’t otherwise receive the insurance proceeds.
It’s very common for parents to want to leave money to their kids and it is a responsible choice to make sure there is money available to provide for your children if you pass away before they become financially independent.
What Are the Disadvantages of Naming a Minor as Your Life Insurance Beneficiary?
While it makes sense to want your children to receive your life insurance proceeds, there are major downsides to naming your child as the policy beneficiary. Some of those downsides include the following:
- Your kids can’t access the money until later in life: Your children won’t be able to access the funds to use for their financial needs until they reach 18 or 21, depending on state law.
- The transfer process is expensive: When the money must be placed under the control of a legal guardian and then transferred to your children in adulthood, these processes can involve significant costs, including court expenses and legal fees. The money that goes to pay for these costs diminishes the amount of funds available to pass to your children from the life insurance policy.
- You lose control over who manages the funds: If you’ve named your child as a beneficiary, you don’t get to pick who the guardian is; the court appoints someone. The person who is named as the guardian of the money from your life insurance death benefit may not be someone you’d have chosen.
Fortunately, there are ways you can take more control over what happens to the life insurance benefits so the funds are used appropriately for your kids without all these downsides.
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Life insurance proceeds are paid in one lump sum tax free to a beneficiary. There are no transfer fees or costs to the beneficiary.
If you are naming an adult family member instead of your minor children as your beneficiary, it is extremely important to choose someone who you trust, knows your wishes, and will do right by your children.
Keep in mind that the named beneficiary can legally spend the money however they so choose. If you do not have a trusted adult in your life to list as your beneficiary, then consider the benefits of setting up a Living Trust. You can name the Trust as the beneficiary instead, and then the Trust would pay out the life insurance proceeds exactly as requested.
Alternatives to Naming a Minor as Your Life Insurance Beneficiary
Parents have a few options for leaving money to children from a life insurance policy that can be much better than just directly naming children as beneficiaries.
One option is to create a living trust and to name the trust as the beneficiary designation. The money from the death benefit will be transferred to the trust. You can name a trustee—a family member, close friend, or another person you can count on—to manage the assets, and you can provide instructions for exactly when and how the funds are used to provide for your kids and are transferred to your children.
While creating a trust can be expensive, it is often worth doing because this approach provides the most control over how proceeds from a life insurance policy are used to provide for your children’s needs.
You can also set up an account with your life insurer under the Uniform Transfers to Minors Act (UTMA). This act allows you to easily name an adult who can serve as a custodian and manage your child’s funds until your child reaches adulthood. Your designated custodian can use the funds to fulfill your child’s needs, and the remaining funds will transfer to your child once your son or daughter becomes an adult.
Your life insurance agent can provide assistance setting up your account under UTMA, so you get to decide what happens to the death benefit proceeds rather than a guardian being appointed by a court after your death.
Making the Right Choice
In most cases, naming a minor as a direct beneficiary on your life insurance policy is a bad idea because you’ll lose control over who manages the money for your kids, your children won’t get the funds until after age 18, and the process of transferring the funds can be costly.
It’s best to talk with your insurer or an estate planning lawyer about your other options for creating a plan with your child’s best interests in mind.