Life Insurance Beneficiary Minor: Buying life insurance is a smart choice as a parent so that if something happens to you, you can make sure that your children are provided for.
It can be expensive to raise a child and college costs are astronomical, so it makes sense to ensure that financial support is available so that your children can be cared for and have money to fund their education if something happens to you.
However, there is an important decision to make when parents decide to purchase a life insurance policy. The person protected by the life insurance policy will have to determine who gets the death benefits — or the cash that the policy pays out after the death of the parent.
Naming an insurance recipient is not always straightforward when you want to use the funds to provide for a minor child because children under the age of 18 are unable to access and manage the money before they reach adulthood.
Parents can take multiple approaches to ensure that the funds from a life insurance policy are sufficiently used to provide for their children.
This article will help you determine who should be named as the beneficiary of life insurance if you have minor children— as well as what the implications are if the life insurance beneficiary is a woman.
Can You Name a Minor as Your Life Insurance Beneficiary?
As parents, once you buy a life insurance policy, you will name a minor as your primary beneficiary. Nevertheless, as you pass away, a life insurance company will not just give the child the insurance proceeds.
Usually, the court appoints an adult custodian to administer the funds until the child reaches maturity when you have appointed a minor as your beneficiary. This method can be very costly, ensuring that less money is available from the life insurance policy proceeds to provide for your child.
Usually, the funds will be passed to the child on the 18th or 21st birthday of the child with no strings attached when a guardian handles the funds left to a minor. This can also pose problems when a large sum of money is suddenly given to a young adult.
The specific rules on how to appoint a guardian and how the money will eventually be transferred to a minor will vary by state, so you should check with your life insurer to find out exactly what will happen if you name an underage child as your beneficiary.
Benefits of Naming a Minor as Your Life Insurance Beneficiary?
Naming a minor child as your beneficiary on a life insurance policy has a few advantages. For instance:
Finally, your child will have the right to use the money as required. When the money is finally passed to your son or daughter, your child will pay for the cost of schooling, health care, or other necessities of life.
Your child will use the funds more than other potential heirs. Your child is probably relying on you financially and is not self-supporting. Because in most cases your children don’t have their own money, they need funds to provide for them. Proceeds from your life insurance policy will insure that they are not financially struggling, particularly when they become young adults.
If you choose to make your child the primary beneficiary on your life insurance policy, you might decide to add a contingent beneficiary in case the original beneficiary dies or can not otherwise receive the insurance proceeds.
It is very common for parents to want to leave money for their kids and it is a responsible choice to make sure there is money available to provide for your child(ren) if you should pass away before they become financially independent.
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 cannot access the money until later in life: Your children will not be able to access the funds to use for their financial needs until they reach 18 or 21, depending on the state law.
The transfer process is quite expensive: Since the money must be placed under the control of a legal guardian and then transferred to your children in adulthood, these processes involves significant costs, including court expenses and legal fees. The money that goes to pay for these costs reduces the amount of funds available to pass to your children from the life insurance policy.
You lose control over who manages funds: If you have named your child as a beneficiary, you do not get to pick who the guardian is; the court appoints someone. The person who is picked as the guardian of the money from your life insurance death benefit may not be someone you would have chosen.
Gladly, there are ways you can have more control over what happens to the life insurance benefits so the funds are used rightly for your kids without all these downsides.
Alternatives to Naming a Minor as Your Life Insurance Beneficiary
Parents have a few options to leave money from a life insurance policy to children, which can be much better than simply directly naming children as beneficiaries.
One option is creating a living trust and naming the trust as the designation of the beneficiary. The funds will be distributed to the trust from the death benefit.
You can name a trustee — a family member, close friend, or another person you can count on — to administer the property, and you can have guidance about exactly when and how to use the funds to provide for your children, and how to move them to your children.
While creating a trust can be expensive, it is often worth doing because this approach provides the greatest control over how to use a life insurance policy to meet the needs of your kids.
Under the Uniform Transfers to Minors Act (UTMA), you can also set up an account with your life insurer. This act makes it easy for you to appoint an adult who can function as a custodian and control the funds of your child before your child reaches adulthood.
Your appointed custodian may use the funds to meet the needs of your child, and the remaining funds will be transferred to your child when your child becomes an adult.
Your life insurance agent can assist you in 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 you pass on.
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’re going to lose control over who manages the money for your kids, your kids won’t get the money until after age 18, and it can be expensive to transfer the funds.
It’s best to talk about your other choices and create a plan with your child’s best interests in mind with your insurer or a estate planning attorney.