Purchasing ļ»æļ»ælife 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 benefitsāor 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 childrenāas well as what the implications are if your life insurance beneficiary is a minor.
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.
Naming a minor child as your beneficiary on a life insurance policy does have a few advantages. For example:
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.
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:
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.
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 trusteeāa family member, close friend, or another person you can count onāto 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.
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.