Updated November 12, 2021|5 min read
When you get life insurance, you name beneficiaries, the people who get the policy’s death benefit when you die. Most people name their spouse or partner as the primary beneficiary, but many want to name their children too.
That instinct makes sense: life insurance is meant to replace the financial support you give your family, including childcare costs. But, legal restrictions mean minors can’t actually be paid the death benefit, so it’s better to stick with an adult beneficiary. If you can’t name your spouse, naming an irrevocable trust ensures that the payout goes toward your child’s care.
Naming a minor as the beneficiary of a policy can delay the payout for an extended period.
Life insurance companies can’t pay a death benefit directly to anyone who has not reached the age of majority: age 18 in every state except Alabama and Nebraska, where it’s 19, and Mississippi, where it’s 21.  Before that, a judge chooses an adult to manage the funds on the minor’s behalf.
In the months before a legal decision is made, your child won’t have the financial support you intended to provide for their care.
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It’s in your minor child’s best interest to not be named a life insurance beneficiary. The best way for your child to avoid payout delays and legal proceedings is to name a trust as either your primary or contingent beneficiary.
“I would recommend an irrevocable life insurance trust (ILIT) to own the insurance policy, with the child named a beneficiary of that insurance trust,” says Asher Rubinstein, an estate planning attorney at Gallet Dreyer & Berkey LLP. “When the insured person (presumably the parent) passes away, the insurance company would pay the death benefit to the trust. The trust should be written with terms that require the trustee to apply the trust funds for the care of the beneficiary (child).”
When you die, the trustee will manage the death benefit (and any other money in the trust) according to your directions.
“The trust is the best route to go by far,” says Chris Sabey, Policygenius sales associate. “A will designates guardianship, but how assets are distributed is contestable. Whoever the guardian is would be entrusted to provide for the minor under court supervision, but a lot could go wrong.”
A trust, however, lets you specify exactly how money is distributed. “The person who sets up the trust (called the settlor or grantor) can specify, right in the trust document, what his or her wishes are,” says Rubinstein. “For example, the grantor can state that the trustee should pay for the child’s college education, and then distribute the remainder at a certain age, like age 25 or 30. This would ensure that the funds are preserved and not distributed to someone too young and not financially mature.”
“I would also suggest a last will and testament, which should be a pour-over will, meaning that any assets not specifically included in the trust are ‘poured’ into the trust at death,” says Rubinstein.
If you’re able, designate your spouse as the primary beneficiary and your trust as your contingent beneficiary. Your spouse can continue managing your household finances and set money aside for your child’s future. If you both pass away, the trust can take over.
“Remember, the physical guardian of your kids doesn’t have to be the same person as the monetary guardian,” says Kristi Sullivan, a certified financial planner and owner of Sullivan Financial Planning. “It doesn’t have to be the same person handling the emotional and financial well-being of the minor children.”
If your beneficiary is under the age of majority when you die, a court-appointed adult becomes the custodian of the funds. The court will most likely choose the surviving parent or the guardian listed in your will.
The money goes into a custodial account, such as a trust or UTMA account. Then, the custodian manages the funds — they can invest the money and make withdrawals for eligible expenses — until your child comes of age. When your child can access the money varies by state and isn’t always the same as the age of majority.
The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) allow money in a custodial account to be used for some of your child’s eligible expenses, regardless of their age. State law defines what counts as an eligible expense. The most common use of custodial funds is to pay for a child’s education, but some states also count summer camp or the child’s cell phone bill as eligible expenses.
Having money in a UTMA or UGMA account counts as an asset and could reduce your child’s eligibility for financial aid. If you’re leaving the death benefit to your child because you want to pay for their education, direct it to a 529 account instead.
Buying life insurance for your child is not the same thing as naming your child a beneficiary, but getting a separate policy for your child isn’t recommended either. Child life insurance policies are costly and usually unnecessary, since you don’t rely on your child for income.
The exception is if your child has a medical condition that would make buying life insurance unaffordable or impossible to purchase later in life. Buying a policy for your child in this scenario locks in a more affordable rate and gives them coverage for their own future family as an adult.
Having a strong estate plan, complete with a will and trust, and updating your life insurance beneficiaries after every major life event will keep your kids safe if you die while they still depend on you.
You can, but it’s not recommended because a minor can’t legally receive life insurance money.
Your beneficiary should be your spouse or a trust.
A court appoints a custodian to manage the payout until your child reaches the age of majority, which can delay access to financial support.
A minor is someone under adult age and a dependent is anyone who relies on your income. Your life insurance coverage should account for all dependents, even if they’re not minors.
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