The beneficiary of your life insurance policy is the person who gets the death benefit if you die. Most people name their spouse, partner, or child as the primary beneficiary, but it’s not recommended that you name a minor child.
Due to legal restrictions, minors can’t be paid the death benefit directly, so it’s better to stick with an adult beneficiary or set up a trust for your child.
Why is naming a minor child as a life insurance beneficiary a bad idea?
Naming a minor as the beneficiary on your policy is not a good idea because it will delay the payout. Life insurance companies can’t pay funds directly to anyone who has not reached the age of majority, which is age 18 in every state — except Alabama and Nebraska, where it’s 19, and Mississippi, where it’s 21.
Before your minor child receives the death benefit, a court will have to appoint an adult custodian who will be responsible for managing the funds from the payout.
What happens with the death benefit if you name a minor as a beneficiary?
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 — if you have one.
The custodian will be able to access the funds for state-approved expenses, like education for your child. Most states will allow your child to access the money beginning at age 18. But the process of appointing a custodian can take several months. During that time, your child won’t be able to receive the financial support you intended for them.
Who should you name as a beneficiary on your policy instead?
These options can help ensure that your minor child receives the payout from your policy upon your death in a timely manner:
Setting up a trust for your child
Designating a custodian
Naming your current or former spouse
Creating a trust and appointing a trustee
“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. You could designate funds for education, an allowance, or a car, for your child when you are gone. You can also dictate that the funds are held until the child reaches an age that you deem suitable, rather than when they reach the age of majority.
“The trust is the best route to go by far,” says Patrick Hanzel, certified financial planner and advanced planning manager at Policygenius. “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.”
Designating a Custodian
If you aren’t able to set up a trust for your minor child, you can name a custodian to help them claim and manage the death benefit. A custodian is responsible for claiming the death benefit on your child’s behalf and will manage the money until your child turns 18.
The custodian will be able to use the money if it’s in your child’s interest, like to pay for tuition or necessities. If you choose this option, it’s important to name a custodian that you trust to act in your child’s best interest.
Naming your spouse as the policy’s beneficiary
If it makes sense for your family, name your spouse as the primary beneficiary and your trust as your contingent beneficiary — also known as secondary 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.
Note that single parents aren’t required to give any portion of the death benefit to their child’s other parent unless it’s been ordered in a divorce agreement.
“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.”
Do you need to get a life insurance policy to cover your child?
Getting a separate policy for your child isn’t recommended. Child life insurance policies are costly and usually unnecessary, since you don’t rely on your child for income.
The one 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.
The best thing you can do for your child financially is to have a strong estate plan, complete with a will and trust. Be sure to update your life insurance beneficiaries after every major life event so they’ll be protected if you die while they still depend on you.
If you need help understanding your life insurance policy or beneficiary information, a Policygenius expert can help.