Who Can Be A Life Insurance Beneficiary?

When you take out a life insurance policy, you will need to designate a beneficiary. While this is usually a spouse, child, or other family member, it is not a requirement for the beneficiary to be a relative. A life insurance beneficiary can be anyone from a close friend to a charitable trust.

Who can be a life insurance beneficiary?

When you take out a life insurance policy, you can name anyone as a beneficiary—they don't have to be a relative. However, there are no hard-and-fast rules, and it's important to check the laws in your state. For example, if you live in a community property state and are married, your spouse may have to give consent for you to add beneficiaries who aren't them.

• Spouse
• Children
• Parents
• Siblings
• Close friends
• Charities or churches
• A trust
• Your estate

You can also name multiple beneficiaries and decide how you want the funds to be divided among them.

What happens if you don't name a beneficiary?

While it is not mandatory to name a beneficiary on a life insurance policy, it is highly recommended. If you don't name a beneficiary, the death benefit will typically become part of your estate, which can cause complications and delays in the distribution of funds to your loved ones.

When a life insurance policy has no named beneficiary, the death benefit usually becomes part of the policyholder's estate. This triggers a legal process known as probate, where a court oversees the distribution of assets. Probate can be lengthy and costly, delaying the disbursement of the death benefit to heirs. During probate, the court will assess the policyholder's financial situation and determine how to distribute the assets from the policy. This process can take months, if not years, meaning loved ones may not receive the money when they need it most.

Additionally, when the death benefit becomes part of the estate, it may become accessible to creditors. This means that any outstanding debts could be paid off using the death benefit, reducing the amount that ultimately goes to the policyholder's heirs.

To avoid these potential issues, it is generally recommended to name at least one primary beneficiary and a contingent beneficiary on a life insurance policy. This ensures that the death benefit is distributed according to the policyholder's wishes and helps streamline the process for loved ones to receive the funds.

What happens if you name a minor as a beneficiary?

While it is possible to name a minor as a life insurance beneficiary, it is not recommended. If you name a minor as your life insurance beneficiary, the death benefit will not be paid directly to them. Instead, a court will appoint an adult custodian to manage the funds until the minor reaches the age of majority (18 in most states). This process can be lengthy and costly, and it may result in reduced funds for the minor. Therefore, it is generally better to name an adult beneficiary or set up a trust for the minor.

If you want the death benefit to go to your minor child, you can set up a trust for them. This will ensure that they receive the benefit promptly and without having to pay taxes or legal fees. You can also specify how you would like the death benefit to be distributed by the trust. For example, you may want a portion of the funds to be used for your child's education, with the remaining amount distributed to them at a later age.

Another option is to designate a custodian for the minor. The custodian will be responsible for claiming and managing the death benefit on the minor's behalf until they turn 18. The custodian can use the money for state-approved expenses, such as the minor's education. It is important to choose a custodian you trust to act in the minor's best interest.

If you have a spouse or partner, you can also name them as the primary beneficiary and the trust as the contingent beneficiary. This way, your spouse or partner can continue managing your household finances and saving for your child's future. If both you and your spouse pass away, the trust can take over.

What are the pros and cons of naming a minor as a beneficiary?

A beneficiary does not have to be a relative, and it is possible to name a minor as a beneficiary of a life insurance policy. However, there are some important considerations to keep in mind when making this decision. Here are the pros and cons of naming a minor as a beneficiary:

Pros:

• It ensures that your minor child will receive a financial benefit from your life insurance policy, which can be used to provide for their needs and future.
• You can specify how the life insurance proceeds should be distributed to your minor child, giving you control over how the money is used.
• Naming a minor as a beneficiary can be an important step in creating a comprehensive estate plan that includes providing for your child's future.

Cons:

• Minors cannot legally manage their own money, so the proceeds may be sent to a legal guardian or custodian who will oversee the funds until the minor reaches the age of majority (usually 18).
• The process of appointing a custodian or legal guardian can take several months, during which time your minor child may not have access to the financial support you intended for them.
• Once the minor reaches the age of majority, they will have full control over the funds and may spend them however they wish, which may not align with your original intentions.
• There may be fees and costs associated with the court overseeing the distribution of inherited assets to a minor, reducing the total amount available for your child.
• Naming a minor as a beneficiary may delay the payout of the life insurance policy, as the insurance company will need to wait for the appointment of a custodian before releasing the funds.

Overall, while it is possible to name a minor as a beneficiary, it is important to carefully consider the potential challenges and delays that may arise. An alternative option is to set up a trust for your minor child and name the trust as the beneficiary of your life insurance policy. This can provide more control over how the funds are distributed and used, and can help avoid the need for court oversight and the associated fees.

What are the alternatives to naming a child as a beneficiary?

While it is possible to name a child as a beneficiary, there are some complications that can arise from this decision. For instance, minors cannot legally manage their own money, so the proceeds may be sent to a legal guardian or a court-appointed guardian. This could result in a lengthy legal battle if the guardian is not someone you intended to have access to the funds.

• Name a legal guardian: Most states allow a legal guardian to receive payouts on behalf of minors. This means you can appoint someone you trust to act in the best interest of your child and manage their finances until they turn 18.
• Establish a trust: You can set up a trust and name it as the beneficiary. This is a good option if you want to ensure the money is used for your child's care while they are still minors. A trust can also be useful if you want to leave money to a child with special needs without interrupting their government assistance.
• Name your child as a contingent beneficiary: You can name your child as a contingent or secondary beneficiary, who will only receive the benefit if your primary beneficiary dies before you. This ensures that the money stays in the family and is not used to cover things like legal fees and debt payments.
• Name a spouse or other adult: In most scenarios, the person who receives the death benefit is a spouse or partner. Leaving the money to your significant other allows them to ensure the rest of the family is looked after. If you do not have a partner, you can name another trusted adult, such as a sibling or close friend.

Frequently asked questions