What if I Want My Child as the Beneficiary of Life Insurance?
You can’t directly name a child as a beneficiary of life insurance. However, you have a few options to name a spouse or child as alife insurance beneficiary and make sure your loved ones are cared for.
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UPDATED: Jun 10, 2022
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- Minor children can’t receive life insurance payments, so parents or guardians must find other ways to get the funds to the child
- There are several avenues, each with different benefits and drawbacks
- Parents and guardians should consider the needs of the children and the personalities of intended future guardians when planning
Life insurance is a vital tool to protect your family in case you’re no longer there. When you have minor children, you’ll want to ensure they receive the money they need. You’ll have to decide if making your life insurance beneficiary a spouse or child is the right path.
If you can’t leave the policy to a spouse, you’ll want to learn about the different ways children may be able to get the funds as they finish their childhood and enter adulthood. See how the different options can bring stability to your child’s future.
How can I name my child as the beneficiary of life insurance?
You have a few options when it comes to making sure your children can access the money you have in whatever type of term life insurance you carry. Each has benefits and drawbacks. That main choices are:
- Create a trust
- Designate the child’s guardian as beneficiary
- Utilize the Uniform Transfer to Minors Act
- Leave the money with the insurance company
Deciding which method works best for your family will depend on your circumstances.
Naming a Trust As Life Insurance Beneficiary for a Minor Child
One typical option is establishing a trust for your child and having the life insurance policy payout to the trust. Then work with a lawyer to create distribution rules for the trust. This allows you to decide when and how much money goes to your child.
When considering a trust, keep in mind that they are not free to start. You will need to pay fees upfront. You also need to designate the trustee that will manage the trust. This could be a bank, accountant, or lawyer.
Leave the Money Directly to Your Child’s New Guardian
Because someone will have to take custody of your child in your absence, you may want to name that person as the beneficiary. Your life insurance company will pay them directly, and they will be responsible for using the money in the child’s best interest.
This is one of the simplest ways to get the money to your child but is an exercise in trust. You need to be confident that the person caring for them will use the money the right way because there are few safeguards to prevent misuse.
For people going this route, early communication is essential. Express how you want your children provided for. That includes talks about paying for higher education and major expenses like vehicles. The new guardian should know what you had planned for your kids.
Explore the Uniform Transfer to Minors Act
If you want to name a life insurance beneficiary who’s a child under 18, look into the Uniform Transfer to Minors Act in your state. This act transfers the life insurance money to a financial custodian who is meant to manage the funds until the child comes of age.
This could be helpful if you want a third party who will not be your child’s guardian to take care of the finances. Your insurance company will have special forms for you to fill out to go this route.
Have the Life Insurance Company Hold the Money
Even if you directly list your life insurance beneficiary as a minor child, the insurance company can’t issue payment directly to a person underage. However, some term life insurance companies offer retained asset accounts.
With this option, the money from the policy is put into an account that bears interest. The balance is guaranteed, even if it is more than typical banking limits.
However, the interest earned on the account is taxable, so your beneficiary may have to manage that expense in the future.
Avoid Naming a Life Insurance Child Beneficiary
If you can help it, avoid having your life insurance beneficiary be a minor child, even if it is allowed. Even if they’re nearly 18 when you’re setting up the policy, it may not be a good idea for them to have control of a large amount of money at that age.
While they may mean well, many young people are inexperienced with managing money. Also, they will be grieving a significant loss and may not have the maturity yet to make the best choices as a life insurance child beneficiary.
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Concerns When Naming a Child as Beneficiary of Life Insurance
It is important to be thorough when making plans to get your life insurance benefits to your children. Consider the personality and temperament of your child and whoever will become their guardian. If you don’t think they can handle getting a lump sum of money, use a method that controls distribution. Study the life insurance terms of any policy carefully.
Plan carefully if you have multiple children. You’ll want to make sure each gets a fair share and money doesn’t run out before the younger ones come of age.
Create backup plans for the administration of the money. It’s sad to think about, but the person you name as trustee or guardian may not be around forever. If something were to happen to them, do you have a backup trustee in place?
Make sure anyone involved in your plans understands the work that may be required on their part. There may be yearly reporting requirements for trusts or Unified Transfer to Minor Act situations. As well, trust income tax rates are sometimes higher than individual tax rates.
Carefully consider any debts you may have and any that may be held by potential adult beneficiaries who you would want to take care of your children. If the adult beneficiary will receive the entire sum of your policy, ask the question: can child support take life insurance from the beneficiary?
Plan Your Life Insurance Contingent Beneficiary for Your Minor Child
Coming up with a game plan for what happens to your children when you are gone is not a pleasant activity, but having a structure in place is critical for your family. Don’t put off getting your affairs in order.
This can start with simple conversations, both with your children and with your loved ones who may become guardians or trustees. Research which methods are best for your family based on the age of your children and the expected needs they will have, including education.
Once you have these parameters set, you can find a policy and coverage level that suits your needs.