More on Life Insurance
More on Life Insurance
Avoid naming minors as life insurance beneficiaries. Instead, choose a reliable adult or designate a trust account as your policy’s beneficiary to ensure your children’s financial protection
Updated August 11, 2020
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When you get life insurance, you choose beneficiaries to get the death benefit if you die. In most cases, the primary beneficiary will be your spouse or partner – but a lot of people want to name their children as their beneficiary.
That makes sense: life insurance is meant to pay for expenses you currently cover that might create financial hardship if you weren’t around to continue paying for them. Some of those expenses include college tuition, housing costs or medical care. Your children will certainly need the cash from a death benefit, but if they are under the age of majority (18 in most states), it’s best not to give your child a payout directly.
Besides the ethical quandary of giving a minor a large sum of money intended to last many years, there are legal restrictions in place nationwide that prevent you from doing so. Still, it’s not impossible to make sure the death benefit goes to your child. In general, adding a child as a life insurance beneficiary is a bad idea but you can still cover your children financially with life insurance. By designating a reliable adult or creating a trust and naming the trust as the beneficiary, you can make sure your children are financially protected.
While you can name a minor as a beneficiary, there are age restrictions to whom insurance companies can pay the death benefit
The best alternative to naming your child as a beneficiary is to name your spouse or another adult you trust to distribute the money according to your wishes
Creating a trust and appointing a trustee, in addition to creating a will can make sure your child is financially secure when you die
When you calculate how much life insurance you need, you’ll factor in all the costs of caring for and providing a comfortable life for your children. In fact, those costs could make up a large portion of the coverage you need as you add up expenses like future education.
Our life insurance calculator below can give you a tailored recommendation for how much coverage you need.
Most people choose between term and whole life insurance. Whole life insurance lasts your whole life, but the older you get the less your family relies on you for an income. For that reason, if you want to name a child as a beneficiary, you should get term life insurance, which pays out only if you die during a preset period of years while your kids still depend on you financially.
To name a child as a beneficiary, simply tell the insurer when you sign the policy to whom you’d like the policy to pay out. In some cases, you’ll be legally prohibited from naming your child as a life insurance beneficiary, such as in “community property” states that require you to name your spouse.
If there’s no law in your state against it, there’s virtually nothing holding you back from making your child the beneficiary. But that doesn’t make it a good idea.
Although you can make your child the beneficiary of the death benefit (if state laws allow it), that doesn’t mean you should. It’s very difficult for a child to actually receive the death benefit if they are still a minor. Life insurance companies are prohibited from paying out a death benefit directly to anyone who has not reached the “age of majority.” The age of majority is 18 in every state except Alabama and Nebraska, where it’s 19.
If your minor child is the beneficiary of your policy, the death benefit could instead be given to a court-appointed legal guardian, even if the child’s other parent is still alive (although the surviving parent should still be able to become the custodian of the funds once he or she petitions the court). This creates an unnecessary layer of bureaucracy that could tie up the funds from your policy for years, and which likely won’t end with your child receiving any part of the payout until they reach the age of majority anyway.
If your beneficiary is under the age of majority when you die, the death benefit will be given to a custodian of the funds to hold on to. This guardian can be court-appointed, but the court will most likely choose the surviving parent. If you want to designate someone other than the child’s surviving parent to be the custodian, you need to specify this in your policy. This person will put the death benefit into a custodial account, such as a life insurance trust or UTMA account, to receive the payout as the beneficiary.
The custodian of the account works on behalf of an investment firm and owns the account until the child reaches the age of majority, after which the child will own the account. It's important to note that the age of majority and the UTMA account distribution age varies by state. In some states, your child could reach the age of majority at 18, but would not be able to recieve the full UTMA funds until several years later at age 21. While the custodian owns the account, the money may be invested into assets such as mutual funds and stocks.
Thanks to the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), money in the custodian account, regardless of your child's age, can be used for some of your child’s eligible expenses. What constitutes eligible expenses depends on state law. (The differences between UGMA and UTMA are negligible, but each state has either one or the other on the books, usually UTMA.) The most common usage for a custodial account is to pay for a child’s education expenses, but eligible expenses may range from sending your kid to camp or paying their cell phone bills.
However, having money in an UTMA or UGMA account counts as an asset and could reduce the child’s financial aid. If you’re leaving the death benefit to your child because you want to pay for his or her education expenses, you may want to consider directing it to a Section 529 account. Section 529 accounts can be tax-free when tapped for college.
A minor is a child under the age of majority. A dependent is someone who relies on you for their care. Every minor is a dependent, but not every dependent is a minor. Your life insurance coverage should be enough to make sure every dependent in your household, whether that person is an adult you care for or a child, has enough to continue living on in the absence of your financial contributions.
It’s in your child’s best financial interest to not be named a life insurance beneficiary while they are still a minor. The payout delays, legal proceedings and expense restrictions that accompany custodial accounts can be avoided with the following alternatives:
Trust funds aren’t just for rich people. Instead of naming your child as a beneficiary to your life insurance policy, you can create a trust, lay out rules for the payout and name a trustee. Then, when you die your trustee can manage and allocate the money from the death benefit (and any other money in the trust) to your children and according to your wishes. State laws limit what expenses those funds can pay for, which we will get into later.
Your best bet to ensure your children receive your life insurance benefit is to designate your spouse, the child’s other parent or another adult you trust as the beneficiary who will make intelligent decisions for your children. This adult beneficiary can pick up where you left off with your household finances, set cash aside for your child’s future or increase your child’s allowance.
When you sign up for life insurance, you’ll be asked to name contingent (secondary) beneficiaries to the policy. It’s important to have these in case the primary beneficiary dies before you do or otherwise can’t receive the death benefit.
Most people choose their spouse as their primary beneficiary, so if you’re trying to keep the money in the family then you might want to name your child as the contingent beneficiary. Both you and your spouse could die– think: Frodo Baggins (boating accident), Harry Potter (murder by the dark wizard Voldemort), and James of giant peach fame (escaped rhinoceros) – in which case you don’t want the money to hang in limbo.
Naming your child as a contingent beneficiary makes sure the death benefit won’t go to your estate, where it could be eaten up by debt payments and legal fees. Your spouse, the primary beneficiary, will still be protected if they are alive. And, if you’re both gone, then at least you know you’re still caring for your family by naming your children as contingent beneficiaries.
Contingent beneficiaries make sure you have some control over the death benefit if something happens to your primary beneficiary. However, you should periodically review your beneficiaries, especially when major life events occur, and update them as necessary.
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Buying life insurance for your child is often confused with naming the child as a beneficiary on your policy. Like making the child a beneficiary, buying child life insurance is unwise. That’s because children don’t have any dependents or (usually) anyone who relies on them for financial support.
The exception to this rule is if your child has a medical condition that would make buying life insurance more expensive or even impossible to purchase later in life. It’s cheaper to get insured the younger you are, but you’ll have to buy a whole life insurance plan to make sure the coverage lasts long enough for your child to grow up, get married, and have a family. You’ll be future-proofing your child’s family in case the medical condition becomes serious later in life.
But whole life insurance is itself often very expensive, and you’d be doing your child a favor if you simply invest that money in a college savings account (like the aforementioned 529 plan) instead. If you’re set on getting life insurance for your child, look into adding a rider to your own life insurance policy. Riders are additional terms and conditions added to a policy to cover situations specific to the insured. In many cases, adding a child rider to the life insurance policy could cost you no more than an additional $5 per month.
While adding a child rider to your life insurance policy is cheaper than taking out a whole new policy for your child, that also means the death benefit is smaller than that of a separate policy.
If you’re a single parent, you’ll need to name a legal guardian for your children in case something happens to you. In most cases, you’ll want to name that same caretaker as your life insurance policy’s beneficiary to ensure your child is financially covered.
Even if your child’s other parent is still alive, you are not required to give any portion of the death benefit to them (regardless of whether they contribute to your child’s finances). However, if you trust another adult – such as an adult sibling, a grandparent, aunt or close friend – you may decide to allocate part of the death benefit to them, knowing they will use it for your children.
A will can come in handy for every parent, but especially single parents looking for more control over how their assets will payout to their children. A will and testament can allow you to delegate exactly how much money from your life insurance benefit should be used and can help clarify your wishes. A will can be especially helpful for an added layer of protection if your relationship with your child’s other parent is complicated.
If you were the beneficiary of a life insurance policy when you were a child, and the insured has died, it’s possible that the life insurance company still has the money. In some cases, especially after a length of time has passed since the insurer became aware that the policyholder is deceased, the life insurance company will send the money to your state’s unclaimed property offices.
The National Association of Insurance Commissioners (NAIC) has a Life Insurance Policy Locator Service that searches participating insurance companies for lost or missing life insurance policies. You need to provide some basic information about yourself and the deceased, such as the deceased’s name, date of birth and social security number to use the service. If you’re a beneficiary, you’ll hear back from the NAIC within 90 business days.
When filing a claim, the life insurance company should be able to tell you where the money is located. If you suspect that you’re the beneficiary of a death benefit but aren’t sure how to claim it, please read Policygenius’ guide to filing a claim after the insured has died.
It’s best to avoid naming a minor as a life insurance beneficiary. On a surface level, giving a child a large sum of money intended to last several years is concerning. But even if you have a kid who’s 13 going on 30, insurers are not legally permitted to pay out death benefits to anyone under the age of majority (18 in most states).
The best alternatives to ensure your children are financially protected if you die is to name an adult you trust as the beneficiary, create a trust or – as a last resort – name your child as a contingent beneficiary in case your spouse or co-parent also dies.
Creating a strong estate plan, complete with a will and trust, and updating your life insurance policy beneficiaries after every major life event will keep your kids financially safe in case you die while they still depend on you.
Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
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