Life Insurance Beneficiary: Can Minors Be Named?

Life insurance is a way to provide financial security for your loved ones after you pass away. When you purchase a life insurance policy, you can choose your child or children as beneficiaries who will receive the payout. However, there are some legal implications when naming a minor as a beneficiary. Minors lack the legal capacity to manage the proceeds of life insurance policies, so the court will appoint an adult custodian to manage the funds until the child reaches adulthood. This can be an expensive and time-consuming process, resulting in less money being available for the child. To avoid these complications, you can consider alternatives such as setting up a life insurance trust or naming an adult caregiver as the beneficiary.

Minors can be beneficiaries, but there are legal implications

Yes, it is possible to name a minor as your primary beneficiary when you purchase a life insurance policy. However, there are legal implications to consider.

Firstly, minors lack the legal capacity to manage the proceeds of life insurance policies on their own. Therefore, it is essential to designate an adult guardian or custodian for the child during your estate planning. This guardian will be responsible for ensuring that the child’s share is used appropriately and in their best interests. The court will most likely choose the surviving parent or the guardian listed in your will.

Secondly, the process of appointing a custodian can be time-consuming and expensive, reducing the amount of money available to the minor. The transfer process does not come cheap, and there may be court expenses and legal fees to consider.

Thirdly, you lose control over who handles the funds. The court will appoint an individual to manage the funds, and this may not be someone you would have chosen.

Finally, the minor will not have access to the money until they turn 18 or 21, depending on the state. This can pose problems when a young adult is suddenly handed a large sum of money.

To avoid these legal implications, you could consider the following alternatives:

• Set up a life insurance trust or living trust: You can name your minor child as the beneficiary of the trust's assets and appoint a trustee to manage the funds on their behalf until they reach adulthood.
• Name an adult beneficiary: Instead of naming your minor child directly, you can name a trusted adult who will use the money for the child's benefit. This could be your spouse, partner, or other potential caregivers.
• Create a UTMA account: The Uniform Transfers to Minors Act (UTMA) allows you to name a custodian to manage your child's assets until they become an adult.

Insurance companies won't pay out directly to minors

Insurance companies are reluctant to pay out directly to minors due to concerns surrounding a lack of guardianship. Minors lack the legal capacity to manage the proceeds of life insurance policies on their own. Therefore, insurance companies will not write death benefit cheques to minors.

If a minor is named as a beneficiary, the court will appoint a property guardian to manage the funds until the child reaches the age of majority. This process can be expensive and time-consuming, reducing the amount of money available to the child. The transfer process does not come cheap, and the court-appointed guardian may not be someone the deceased would have chosen.

The specific rules for how a guardian is appointed and how the money is transferred to a minor vary by state. However, generally, the funds will be transferred to the child upon their 18th or 21st birthday, depending on the state. This can pose problems when a young adult is suddenly handed a large sum of money.

To avoid these issues, it is recommended to set up a trust fund or name a trusted adult as the beneficiary instead.

A court-appointed custodian will manage the funds

If you name your minor child as the beneficiary of your life insurance policy, a court-appointed custodian will manage the funds until your child reaches adulthood. This is because minors lack the legal capacity to manage the proceeds of life insurance policies on their own. The court will most likely choose the surviving parent or the guardian listed in your will. The custodian will be able to access the funds for state-approved expenses, like education for your child.

The process of appointing a custodian can take several months, during which your child won't be able to receive the financial support you intended for them. This process can also be very expensive, which means there will be less money available from the proceeds of the life insurance policy to provide for your child.

The specific rules for how a guardian is appointed and how the money is eventually transferred to a minor will vary by state, so you should check with your life insurer to find out exactly what will occur if you name an underage child as your beneficiary.

Setting up a trust fund for a minor beneficiary

• Determine the type of trust: The two common types of life insurance trusts are irrevocable and revocable. Irrevocable trusts cannot be changed, altered, or revoked, and they offer protection from creditors and estate taxes. On the other hand, revocable trusts can be changed or revoked and are ideal for those who want flexibility.
• Choose the trust beneficiaries: Consider which family members or heirs should benefit from the policy and how much each will receive. You can specify how the money should be used, such as education, medical expenses, or other financial needs.
• Calculate the amount of insurance needed: Consider your family's current and future finances, inflation, estate taxes, funeral costs, and potential legal costs associated with administering the trust. Speak with a financial advisor to determine the appropriate amount of coverage.
• Select the type of life insurance: It is generally recommended to use a permanent life insurance policy that doesn't expire. However, if cost is a concern, a term life insurance policy is more affordable and can still provide significant benefits.
• Purchase the life insurance: Shop around for quotes and consider policy fees and the growth rate of your cash value. Work with a financial advisor or insurance agent to understand the costs beyond the premium.
• Name the trust as the beneficiary: Ensure that the trust is named as the beneficiary of your life insurance policy so that the proceeds are paid directly to the trust.
• Transfer ownership of the policy to the trust: This step typically involves the grantor signing a form from the insurance company and providing information about the trust. Seek the help of an estate planning attorney to ensure all legal documents are filed correctly.

By setting up a trust fund for a minor beneficiary, you can have peace of mind knowing that your loved ones will be taken care of and that the money will be managed responsibly until they reach adulthood.

Alternatives to naming a minor as a beneficiary

While it is possible to name a minor as a beneficiary on life insurance, there are some legal implications to consider. Insurance companies are typically resistant to giving life insurance payouts directly to minor children, and there may be a delay until a court-appointed custodian is brought in to oversee the funds. Therefore, it is often recommended to consider alternative options, such as:

Establishing a Life Insurance Trust:

This option gives you more control over how the death benefit is distributed. You can specify the distribution of funds, such as allocating a portion for your child's college education when they turn 18 and the remaining amount at a later date. The trust is listed as the beneficiary, and a trustee routes the money according to your wishes.

Designating Your Spouse or Partner as the Primary Beneficiary:

By naming your spouse or partner as the primary beneficiary, they can continue to manage household finances and save for your child's future. In the unfortunate event of both parents' deaths, the life insurance trust can take over.

Creating a UTMA Account:

The Uniform Transfers to Minors Act (UTMA) allows you to name a custodian to manage your child's assets until they become an adult. Once your child reaches adulthood, the assets are transferred, and they can use the funds as they wish.

Designating a Custodian:

If establishing a trust is not feasible, you can name a custodian to help your minor child claim and manage the death benefit. The custodian will be responsible for claiming the benefit and managing the money until your child turns 18. They can use the funds for your child's interests, such as tuition or necessities.

Creating a Special Needs Trust:

If you have a dependent who requires lifelong financial support, naming them directly as a beneficiary could make them ineligible for government assistance. In such cases, establishing a special needs trust and naming the trust as the beneficiary can be a good alternative.

Frequently asked questions