The primary reason many of us seek out life insurance policies is to protect those who are left behind when we are gone. So it stands to reason that, when electing a beneficiary, those that first come to mind are your immediate family. You may choose to have your spouse listed as beneficiary, but what if you want the life insurance proceeds to go towards paying for your minor child’s education, welfare, or other needs? In that situation, is the right decision to make your child the beneficiary?
While your intentions would of course be good, naming a minor child as a beneficiary is typically not recommended.
In the most states underage children are not allowed to receive life insurance benefits until they reach either 18 or 21 years old. If you have not designated someone to act as a guardian or trustee, the decision ends up in the courts. They will name someone to act as a guardian, and this individual may have a very different idea of how to use the money. On top of that, many times the courts choose to place heavy restrictions on how the money can be spent or distributed. I will let your imagination take over from here, but clearly this can turn into a nightmare.
Still, many of us want the funds to go to and be for the benefit of our children, so what is the answer to this? How do you make sure that the money not only goes towards your child’s benefit, but that it is utilized or paid out in the way you envision?
One solid solution would be to create a Uniform Transfer to Minors Act (UTMA) Custodianship with your life insurance company or bank. This is, in essence, setting up a guardian of your choice for your child’s benefit. As long as you have selected a trustworthy individual, this ensures the money is protected until your child comes of age, at which point the funds must be transferred over. The downside here is a lack of control, as once the money is in their hands they could potentially mismanage it.
If you are looking for a greater degree of control or have multiple children you want as beneficiaries, creating a living trust might be the way to go. It is not as intimidating or complicated as it sounds, though I would recommend a lawyer’s assistance. They can help write up trust documentation where you can:
- Specify who will receive the funds, and how much (if more than one person is chosen)
Specify how you want the funds to be distributed (such as a lump sum, installments, at what age, etc)
This method guarantees the child will receive the full death benefit in the manner you wish. It may require slightly more work, but if you are looking for the peace of mind of knowing everything is taken care of, this is the way to go.
Naming children as beneficiaries can be a messy process, but if you take one of the avenues mentioned above you can do so without having to deal with courts, costs, and unwanted legal issues. Then, when the time comes, you can rest easy knowing your loved ones are taken care of.
