Having small children is one of the biggest reasons for buying life insurance coverage, in order to provide them with financial protection if something were to happen to you. However, even though your life insurance policy may be intended for your children, should they be named as the policy’s beneficiaries?
It Seems Simple Enough
If you plan to provide your family with life insurance protection, you may have already calculated how much coverage to buy, accounting for your spouse’s needs, your kids’ expenses, and any other financial obligations.
Most people will make their partner the policy’s beneficiary, since he or she will be the one managing the finances in your absence. There are a few instances, however, where naming your children as beneficiaries might seem more appropriate. This includes:
- If you are divorced and don’t want to name your ex-spouse as the beneficiary
- If you have a child with long-term needs who the policy will provide for
- If you’re a single parent and don’t have a partner to name
- If you want to protect your child(ren) in the event you and your spouse pass away at the same time
While some of these situations may make you think of adding your minor children to the beneficiary column, you might want to reconsider.
Minor Beneficiaries Can Be Problematic
The simple fact is that life insurance companies won’t actually pay out claims to minors, at least not directly. By not naming a beneficiary who has reached the age of majority — which is 18 in most states — you can actually delay the disbursement of your policy’s death benefit.
This could result in funds being kept out of your family’s reach for an extended period of time, exactly when they may need it most.
Some states may also require you to name your spouse (if you have one) as your beneficiary. If you live in one of these states, you will need to ensure that your spouse knows your wishes and that you are in agreement as to how your life insurance proceeds will be used, so that your children will always be protected.
What to Do Instead
There are a few ways to ensure that your life insurance proceeds go where they’re needed most (i.e., your children), without naming them directly as the beneficiaries.
Name a Trusted Adult: If you don’t want to name your spouse or co-parent as the beneficiary, you can choose another trusted adult to facilitate the policy’s proceeds for your kids. This could include naming a parent, sibling, or other close individual. Just be sure that whoever you name is someone you can trust completely, and that they know exactly how you want your life insurance proceeds disbursed to your children).
Appoint a Custodian: You can also consider appointing an adult custodian to manage your policy’s proceeds, according to the Uniform Transfers to Minors Act (UTMA). Legal custodians do not have to be related to you or your kids, but will be responsible for managing the funds for your minor children through age 18 (or 21, in some cases) if you were to die. Once they come of age, your children will receive any remaining funds.
Establish a Trust/Appoint a Trustee: A more formal option is to establish a trust for your children, which will involve appointing a trustee to manage the financial vehicle. When you die, your life insurance policy proceeds will go into the trust, and can be disbursed to your children by the trustee according to your wishes. You can choose to have the funds managed until your children reach a certain age, or for their entire life.
You can also designate certain payout periods with a trust, such as when your kids go off to college, get married, or buy their first home. A trust allows you more control over how and when your kids will receive the funds, rather than them getting a lump sum payment when they turn 18, as would be the case with a UTMA custodian.
As parents, buying life insurance to protect your minor children is an important — often imperative — process. Naming those children as the policy’s beneficiaries may create a big headache, however, and potentially lock necessary funds in limbo when your family needs them most. The alternative options listed above can help ensure that life insurance proceeds are used as planned.
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