Ensuring children’s financial security is one of the main reasons people buy life insurance. That is the reason many policyholders think about naming them as the policy’s beneficiaries. While children can be named beneficiaries, the process of receiving payment can often get complicated.
In this article, our life insurance attorneys describe how to face these challenges and what options are available to promptly ensure minor children can access the life insurance death benefit.
Can the Life Insurance Beneficiary Be a Minor Child?
Yes, minor children can be life insurance beneficiaries. In fact, policyowners can choose any person or entity to be the beneficiary of their life insurance policy – their spouse, children, siblings, parents, friends or even a trust, a company, an estate or a charity. And, unless the designation was made irrevocable, policyowners can change the beneficiaries at any time.
Can a Young Child be Named as a Contingent Beneficiary?
Yes. Many policyowners choose to name their spouse as the primary beneficiary and their children as contingent beneficiaries to ensure the life insurance money stays in the family. A contingent beneficiary collects life insurance benefits only when the primary beneficiary is deceased, revoked or unavailable. In cases where the contingent beneficiary is a child, the benefits are placed in a special account for the child and will become available when the child turns 18.
What Constitutes a Minor for Purposes of Being a Life Insurance Beneficiary?
The age at which children come of age is determined by the state where the child resides as dictated by a Uniform Transfers to Minors Act (UTMA) statute. Adult means an individual between the ages of 18 and 21, depending on the state. This law is important, especially for divorced or separated people whose children may relocate to a different state.
What Happens if a Minor Is a Beneficiary of a Life Insurance Policy
If the parent decides to list their young children as beneficiaries, things become more difficult because insurance companies cannot release the death benefit directly to children under the ages of 18 or 21. Instead, additional steps need to be taken to protect the insured’s wishes.
In cases where disputes arise, the life insurance policy will go through probate. The court will name a guardian to manage the child’s estate until the minor reaches the age of majority. Such cases have several downsides.
- Until the court decides how to distribute the assets, the child has no financial support.
- The appointed guardian may not be someone the insured would have wanted.
- There is no guarantee that the estate assets will be handled the way the insured would have wanted.
- The probate process means that the life insurance money can be used to pay off debts. It also involves fees that will be taken out of the policy amount. These can significantly reduce the funds available to the child when they reach adulthood.
How to Properly Name a Minor as a Life Insurance Beneficiary
There are a few approaches policyowners can take to make sure their children will be able to collect the life insurance money without problems.
1. Designate an Adult Guardian
In some states, you can make the child’s adult guardian the policy beneficiary. The guardian will receive the payment on behalf of the child and will oversee it until the child reaches adulthood and can get full access to the money. This option allows you to bypass the complicated legal processes you would have to go through if you put your child as your beneficiary.
However, it also has some disadvantages. First, you need to make sure the guardian is an experienced money manager. Second, you need to trust that they will act in your child’s best interests, honoring your wishes regarding the use of the death benefit.
Life insurance lawyers rarely recommend naming an adult guardian as the life insurance beneficiary for minor children in order to protect the minor child from possible money mismanagement or fraud.
2. Set Up a UTMA Account
Setting up a UTMA account is the easiest way parents can make sure their children can collect the life insurance payout. Under UTMA, you need to open a special custodial account at a life insurance company, bank, or financial institution to keep the money in until your children reach the age of majority.
Money deposited into a custodial account immediately becomes the property of the child. The trust will hold the life insurance money for your young children until your child reaches the age of majority. But if you doubt that your child will be wise enough to deal with a large sum of money at the age of maturity, it is better to name a guardian to oversee the funds.
You can designate an adult you trust to be the custodian of the account. The custodian is responsible for managing the assets for the minor until the custodianship ends. The account will be transferred to the child when the custodianship ends. The child will then have complete control over the account.
3. Name a Living Trust as Beneficiary
Another option is to create a revocable or family trust (also known as a “living trust,” “inter vivos trust,” or “loving trust”) and name the trust as the beneficiary of the life insurance policy. A revocable trust is written to allow you to revoke or change it whenever you wish to do so.
A revocable trust is legally in existence while you are living and has a trustee who serves and owns the property. Upon your death, the trustee is usually directed to either distribute the trust property to your beneficiaries or continue to hold it and manage it for the benefit of your beneficiaries.
Setting up a revocable trust offers more options than a custodial account. With a revocable trust, you can decide at what age and how much money your children can receive. You can also design a payout plan where your child gets portions of the total sum at different milestones in their life. If you have several children, the flexibility of a revocable trust may allow them to receive funds at different times.
Can Instructions in a Will Help Minors Collect the Death Benefit?
Even though designations in a life insurance policy will prevail over those in a will, spousal inheritance may take precedence in some states. To make sure the proceeds are distributed as the policyowner envisioned, it is recommended to keep life insurance beneficiaries in line with recipients in the will. This may help avoid litigation, beneficiary contests, and high legal fees. You can learn more about what happens in such scenarios from our article on life insurance beneficiaries and wills.
How to Ensure Minor Children Access the Proceeds Without Issues
Policyowners should be very careful when choosing to designate minor children as beneficiaries. As we have pointed out, several unwanted scenarios could appear, preventing the children from receiving the payout as needed or even from receiving it at all.
It is best to plan wisely to avoid causing stress and anxiety to your loved ones. An experienced life insurance lawyer will help you understand the best way to name your minor child as a beneficiary and understand their rights in each scenario.
Call us at (888) 510-2212 for a free consultation with one of our attorneys. We offer competitive contingent fees.