Life insurance is one of the few products you buy that you'll never use for yourself: if you die during the term of the policy, your family is the one who gets the death benefit.
Since the goal of life insurance is to protect your family, most people designate their spouse as the beneficiary of the policy. But if you’re pregnant or have kids, can you name your child as the beneficiary? And even if you can, should you?
The answers are yes and probably not, respectively. But don’t worry – you have other options.
Updating your beneficiaries
Before you go about adding a minor as your beneficiary, let’s talk about the process involved in updating your beneficiaries in general.
When you apply for life insurance, you need to assign a beneficiary. Since the point of life insurance is to provide financial support and income replacement in the form of a death benefit – whether it’s letting your kids go to college or offering it to a charity – not assigning a beneficiary sort of defeats the purpose.
But it’s not uncommon to have to change your beneficiaries over the term of your policy. Maybe your beneficiary died (and hopefully he or she had his own life insurance policy!), maybe you went through a divorce or got married, or maybe you want to add kids or grandkids.
Luckily, updating your beneficiaries is pretty easy. It’s typically as simple as filling out a form. Here’s an example of MetLife’s Change of Beneficiary form. It’s nine pages, and you’ll need some basic information about who you’ll be leaving the death benefit to, whether it’s an individual or a trust.
When you get to the bottom of that form, you might notice this: "Please send us the first eight pages of this form and any additional listings you created by fax or mail." That brings us to an important point in that different insurers require a change of beneficiary form to be submitted in different ways.
MetLife and Pacific Life, for example, require the form to be filled out and sent in by fax or mail. Banner Life, on the other hand, lets you update your beneficiaries online and it can be processed in only a few days.
Resources like PolicyGenius’ insurance company reviews will let you find out what services the nation’s top insurers offer online and which ones require an old school touch. Make sure you know how you’re able to do basic maintenance of your policy or it could turn into a real headache.
Adding a minor as a beneficiary
Naming your child as your direct beneficiary is doable but it’s typically a bad idea, namely because lots of people are wary of handing large sums of money to children. Assumedly this is because they’ve seen Richie Rich or Blank Check and know it’ll go toward a go kart track or something.
That means a probate court-appointed guardian gets into the mix, and ghost-you had better hope he or she is trustworthy enough to hold onto that money until your kid turns 18 (because honestly adults aren’t that great at being given huge amounts of money either).
There are better options out there than "hope for the best." Two ways you can make sure your death benefit goes to your kid: a trust or a Uniform Transfers to Minors Act account. We go through them in detail here, but here’s a quick rundown.
If you’re setting up a trust for your kid, you’ll need to decide between a living trust and a testamentary trust.
With a living trust, all you need to do is write up some trust documents, which will note how the death benefit will be distributed, name the trust as your beneficiary, and...that’s pretty much it. With a testamentary trust, on the other hand, will be set up when you write your will. There are a few differences between the two – a testamentary trust has to go through probate courts – but a lawyer will be able to help you decide which is right for your situation and write up the documents.
A Uniform Transfers to Minors Act account
The Uniform Transfers to Minors Act (UTMA) lets you assign a custodian to a UTMA account, who will turn over the account to your child when they reach adulthood. This is similar to what happens if you name a child directly, but in this case no one has to sit through the legal system assigning a custodian and the delays and costs that come along with it.
UTMA accounts are pretty straightforward, but also inflexible and simplistic so they’re really only useful in specific situations – say, when you’re leaving money to only one child.
Both trusts and UTMA accounts are fairly easy to set up. Look back at that MetLife form, for instance, and you’ll see an entire section devoted to adding a child as a beneficiary and the options you have for that, including a UTMA account, a testamentary trust, and a living trust.
Talk to a financial advisor or lawyer to learn about all of your options regarding the ins and outs of how to – and if you should – leave your death benefit to a minor. The most important thing is that the money goes where it’s supposed to, and doing your research means your child will be protected in the future.