Q

Should I name a child as a life insurance beneficiary?

A

Avoid naming your child as a life insurance beneficiary. Instead, choose a reliable adult or name a trust that can put the funds toward your child’s financial protection.

Rebecca Shoenthal author photoAmanda Shih author photo

By

Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent 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.

&

Amanda Shih

Amanda Shih

Editor & Licensed Insurance Expert

Amanda Shih is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Her work has appeared in Slate, Lifehacker, Jetty, and J.D. Power.

Updated August 18, 2021|5 min read

When you get life insurance, you name beneficiaries, the people who get the policy’s death benefitwhen 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 accept the death benefit, so it’s better to stick with an adult beneficiary. If you can’t name an adult guardian, creating a trust to accept the benefit ensures that the payout goes toward your child’s care.

Key Takeaways

  • You can name a minor as a beneficiary, but it’s not recommended because minors can’t legally accept the payout 

  • It’s best to name your spouse or another adult you trust to distribute the money according to your wishes

  • Alternatively, create a trust and a will to manage the payout for your child

Why is making your child a beneficiary a bad idea?

Although you can make your child the beneficiary of your life insurance policy — it’s as simple as designating them by name in your policy — that doesn’t mean you should. 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. [1]

Naming a minor child as the beneficiary of a policy will add a layer of red tape that can delay the payout for a long time. That means that for months or even years, your child won’t have the financial support you intended to provide for their care.

What happens to the death benefit if you name a minor as a beneficiary?

If your beneficiary is under the age of majority when you die, the death benefit is paid to a custodian of the funds. The custodian is court-appointed, but the court will most likely choose the surviving parent. If you want someone other than the child’s surviving parent to be the custodian, you need to specify this in your policy or will. 

The custodian puts the insurance payout into a custodial account, such as a trust or UTMA account. [2] Then, they manage the funds — they can invest the money and make withdrawals for eligible expenses — until your child reaches the age of majority.

The age of majority and the UTMA account distribution age vary by state. In some states, your child could reach the age of majority at 18, but would not be able to receive the full UTMA funds until age 21. [3]  

How does a UTMA account work with life insurance proceeds?

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. [4]  

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Alternatives to naming a child as your life insurance beneficiary

It’s in your minor child’s best interest to not be named a life insurance beneficiary. You can avoid the payout delays, legal proceedings, and expense restrictions that come with custodial accounts by doing this:

Create a trust and appoint a trustee

Create a trust, set rules for using the payout, and name a trustee to carry out your wishes. 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 according to your wishes and state law.

Name your spouse or another trusted adult as the policy’s beneficiary

The best way 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. Choose someone you trust to pick up where you left off with your household finances and set cash aside for your child’s future.

Name your child as a contingent beneficiary

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 — usually your spouse — dies before you do or otherwise can’t receive the death benefit.

If your primary beneficiary dies first, naming your child as a contingent beneficiary keeps the death benefit from going to your estate, where it could be eaten up by debt payments and legal fees. 

Use your will to express your wishes

Leave clear instructions in your last will and testament about how you want your life insurance money to be used. This additional protection for your child’s well-being applies no matter who you name as a beneficiary of your policy.

A will gives you the option to specify how much money from your policy should go toward your child’s care and how you want that money to be spent.

Who to name as a beneficiary if you’re a single parent

Single parents already need to name a legal guardian for their children in case something happens to them. Name that same caretaker as a life insurance beneficiary so that they have the money necessary to support your child. A will that makes your wishes clear can be especially helpful if your relationship with their guardian is complicated.

Unless it’s been ordered in a divorce agreement, you are not required to give any portion of the death benefit to your child’s other parent. 

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Is buying life insurance for a child the same as making them a beneficiary?

Buying life insurance for your child is not the same thing as naming your child a beneficiary on your own policy, 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. 

You'll give your children the most reliable financial protection by naming an adult you trust as your life insurance beneficiary or creating a trust to manage the money until they come of age.

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. 

Frequently asked questions

Can you make your child a life insurance beneficiary?

You can, but it’s not recommended because a minor can’t legally receive life insurance money.

Should your beneficiary be your spouse or your child?

Your beneficiary should be your spouse, a trust, or another trusted adult.

What happens to life insurance proceeds if your child is a beneficiary?

A court appoints a custodian to manage the payout until your child reaches the age of majority, which can delay access to financial support.

What’s the difference between a minor and a dependent?

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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