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Your policy's death benefit should cover expenses like college tuition or medical care, which your kids use and benefit from. You might think that they’ll need the cash, and while you’re right, it’s best not to give your child a payout directly.
Life insurance is financial protection for your loved ones after you die. As long as you paid your premiums, the life insurance company will pay out a death benefit to the people or organizations you designate to receive it, which are called beneficiaries. You’ll choose a primary beneficiary or beneficiaries as well as secondary beneficiaries. In most cases, the primary beneficiary will be your spouse – in many states, you’re obligated to name your spouse as your beneficiary.
A lot of people want to name their child as a 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 or medical care, which your kids use and benefit from. You might think that they’ll need the cash, and while you’re right, it’s best not to give your child a payout directly.
Besides the ethical quandary of giving a child a sum of money big enough 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 the child in some way. This article will get into the specifics of naming a child as a life insurance beneficiary and why you would or wouldn’t want to. In general, we consider adding a child as a life insurance beneficiary to be a bad idea. We’ll discuss:
Life insurance can protect your family from financial hardship, and that includes your children. You’ll factor in all the costs of caring for and providing a comfortable life for your children when you calculate how much life insurance you need. In fact, that care could make up a large portion of the coverage you need as you add up costs like education.
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.
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 any less unwise.
Although you can make your child the beneficiary of the death benefit (if state laws allow it), that doesn’t mean you should. That’s because it’s very difficult for the child to actually receive the death benefit if he or she is still a minor. Life insurance carriers 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.
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If your minor child is the beneficiary on your policy, the death benefit could 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 for years, and which likely won’t end with the child receiving any part of the payout until he or she reaches the age of majority anyway.
You could appoint a trustee before you die and designate how he or she will disburse the cash to the child, but state laws limit what expenses those funds can pay for, which we will get into later.
Your best bet is to designate your spouse as the beneficiary and hope the person you married makes intelligent decisions with regard to your offspring. He or she can pick up where you left off with your household finances, set some aside for your child, or even consider increasing your child’s allowance.
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.
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 the policy. This person will put the death benefit into a custodial account, such as a life insurance trust, 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. 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 can be used for some of the child’s eligible expenses, and 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 the child’s education expenses, but eligible expenses may range from sending the kid to camp or paying his or her 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. (Learn more about the difference between UTMA accounts vs 529 plans.)
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, as happened to 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, in which case it could be eaten up by paying for debts and legal fees. Your spouse, the primary beneficiary, will be protected if only you kick the bucket, and if you’re both gone, then at least you know you’re still caring for your family.
Contingent beneficiaries make sure you have some control over the death benefit if something should happen your intended recipient. However, you should periodically review your beneficiaries, especially when major life events occur, and update them as necessary.
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 policy holder is deceased, the life insurance company will send the money to your state’s unclaimed property offices.
When filing a claim, the life insurance carrier 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.
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 dead 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 the child, that also means the death benefit is also smaller than that of a separate policy.
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