UPDATED: May 14, 2020
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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.
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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.
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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.
Life Insurance: Think Twice About a Child Beneficiary
Buying life insurance for children is important, but when you apply for life insurance, you will be asked to select a beneficiary (or beneficiaries) for the policy. Naturally, you may choose to list your spouse or minor children without giving it much thought. While listing your spouse is common, adding your children as beneficiaries on your term life insurance policy may not be.
While you certainly have the option to list your children and no life insurance company is going to prevent you from doing so, many experts agree there are better choices to make. Proper planning now will mean fewer problems for your loved ones and in the end will be better for your children. Consider the following before naming a minor as a beneficiary on your term life insurance policy.
Minor Children Need a Guardian
Life Insurance companies are not able to pay death benefit proceeds to minors, even if they are listed as the beneficiary of a term life insurance policy. If a death claim is filed and a minor is found to be the beneficiary, the case will be sent to probate to determine the appropriate course of action. Once a guardian comes forward or has been named, the court may arrange for the proceeds to be placed in the guardian’s control to care for the minor child.
Young Beneficiaries May Squander the Money
If your child is 18 (or 21 in some states), she is longer be considered a minor and can take receipt of the proceeds. However, that is still a very young age to be trusted with a potentially large sum of money. Are you confident you can trust someone of that age to be financially responsible enough to handle the funds? Even if you are, you may want to consider an arrangement that would hold the funds until a later age, or distribute the funds over a period of time rather than in one lump sum. Just think of what you would have done at age 18! Most of us would not have saved or invested that kind of money.
Consider Naming a Trust as Beneficiary
A safe option is to meet with an attorney and establish a trust to name as the beneficiary of the term life insurance policy. Setting up a trust allows you to control the distribution of the funds and helps ensure they will be used for their intended purpose. You can also specify who the trustee(s) will be, adding another level of security. Attorneys who specialize in estate planning are good for helping you design a strategy best suited to your needs.
Keeping the Money With the Life Insurance Company
You may be wondering why we would ever suggest such a thing. We must be joking, right? While not always the best option, it can be very useful in some instances. Many life insurance companies will allow you to keep the proceeds in an account with the insurance company for a period while earning interest. This could be an option if your minor child is close to the age of majority when your policy is issued. It may also be appropriate if you have not yet established a trust, or if you have no one in mind to be the guardian of your child.
Name a Guardian in Place of Your Child
If you have a family member or other trusted person that will take care of your child, you can name this person as a beneficiary in place of your minor child. However, understand that the life insurance company doesn’t have any authority to force the guardian to use the money to care for your children. The guardian, if named as beneficiary, could do whatever they please with the money, so trust is, of course, the main factor in considering this option.
Uniform Transfer to Minors Act
Most life insurance companies will allow you to name your minor beneficiary and also name the financial custodian, under the Uniform Transfer to Minors Act. This act, implemented in most states, allows for the transfer of money to a financial custodian who will manage the money until the child reaches adulthood (age 18 – 21, depending on the state). If you are considering this option, ask your life insurance agent to verify if this is allowed in your state, and to supply the appropriate paperwork.
As you can see, there are some important considerations when naming a minor child as a beneficiary on your term life insurance policy. Having something in writing, such as a trust or other legal document, is your best protection. If you are unsure about your options, talk with a licensed insurance professional or an attorney who specializes in estate planning.
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