UPDATED: Mar 26, 2020
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Term life insurance protects your family from your debts after you die. A life insurance policy does this by paying a death benefit to your family. When you take out a life insurance policy, one of the things you must do is name a beneficiary. If you name your minor child as the beneficiary, however, you must understand how this will affect your family.
How Will You Leave Life Insurance to Your Children?
If you decide to purchase life insurance for the benefit of your children, you need to arrange some legal means for the proceeds to be managed and supervised by a competent adult. If you don’t, and your children are not legal adults when you die, the court will appoint a property guardian for the children. That process necessitates attorneys’ fees, court proceedings and court supervision of life insurance benefits. All of which incur costs and hassles that surely won’t help your children financially after you are gone. There are several ways to prevent this.
You may not want to name minors as beneficiaries of your life insurance policy. Instead, name a trusted adult beneficiary who will use the money for the children’s benefit. If you are confident that this adult will not waver from his or her duty, even years down the line, this might be the easiest option.
You can name your children as your life insurance policy beneficiaries and also name an adult custodian under your state’s Uniform Transfers to Minors Act (UTMA). Most insurance companies permit this and have forms for it. If you want the proceeds to go to more than one child, you’ll need to specify the percentage each receives.
If you have a living trust, you can name the trustee as the beneficiary of the life insurance policy. In the trust document, name the minor children as beneficiaries of any money the trust receives from the insurance policy. Also, establish the trust a method to impose adult management over the proceeds, which can be either a UTMA custodianship or a child’s trust. You’ll need to give a copy of your living trust to the insurance company.
Custodianship vs. Child’s Trust
There are a few significant differences between leaving life insurance benefits to your kids under the UTMA and through a child’s trust. One of which is the age when proceeds are released. In most states, a UTMA custodian must turn the proceeds over to the child at an age specified by law, usually 18 or 21 in most states.With a child’s trust, you can specify any age at which your child receives the proceeds.
Reporting requirements are also essential. A trustee for a child’s trust must file yearly income tax returns for the trust while a UTMA custodian need not file tax returns, although the minor must file an annual return reporting money received. You may also want to consider tax rates as trust income tax rates are higher than individual tax rates. Annual income above a certain amount in a child’s trust is taxed at the higher trust tax rates. In contrast, all of the property subject to the UTMA is taxed at the child’s individual tax rate.
If you are considering any of the above options, ask your life insurance agent to verify if it is allowed in your state, and to supply the appropriate paperwork. QuickQuote insurance agents are more than happy to answer any questions you may have and help find the right term life insurance policy for you.