Life insurance is about securing your family’s financial protection once you’re gone, and for many people that means protecting the financial future of their children. If your children are minors, designating them as beneficiaries brings its own set of problems – though it can be done.
Can I designate a minor beneficiary?
You can designate a minor as your primary or contingent beneficiary. However, minors can’t directly receive life insurance money, because they aren’t considered old enough to know how to properly use the money or set up their own bank accounts.
So while you can name a minor as your beneficiary, the money won’t go directly to them, at least not immediately after your death.
What is a minor?
In life insurance, a minor is generally considered to be anyone under the age of 18 or 21, depending on which state you live in.
A minor isn’t always the same thing as a dependent. An adult child who lives with you, a spouse who doesn’t work, or elderly parents who live with you are all considered dependents, but not minors.
How to ensure your child gets the life insurance payout
To make sure your child gets your life insurance payout, name a custodian for your minor on your life insurance policy. Similar to a guardian on a will, the custodian of your life insurance policy will be in charge of determining how best to use the life insurance money.
Your child’s guardian will also likely be the custodian, but there might be times where they are different people. For example, you might designate your sister to take care of your minor child because she’s excellent with kids, but if you have an aunt who is a financial advisor, you could designate her as the custodian that handles your child’s funds.
The custodian has complete authority over how the funds are used until the minor reaches either age 18 or 21, at which point the minor becomes the owner of the funds.
What if I die while my beneficiary is still a minor?
If you’ve designated a minor as your primary beneficiary and haven’t named a custodian, your life insurance money and other assets are taken to a probate court. Probate courts distribute property and assets after a person’s death.
One problem with the probate court process is that you give up any say in how your life insurance money is used, and sometimes who’s in charge of using it.
For example, if your will doesn’t designate a guardian for your minor, the probate court will designate a guardian for you, typically by looking at your closest relatives. The court then gives custodianship over your life insurance money to that guardian, who will ultimately decide how best to use it for your child.
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Alternatives to naming a minor beneficiary
You have a few different options to ensure your child receives your life insurance money.
- Name a guardian as your primary beneficiary. By naming your guardian as the beneficiary, you can remove any challenges that your guardian, custodian or child would have to access the money if you named your child the beneficiary. Going this route requires a great amount of trust that your designated guardian will use the funds appropriately.
- Name a child as your contingent beneficiary. If you name a guardian or custodian as the primary beneficiary, you can still name your child as a contingent beneficiary. A contingent beneficiary can be thought of as a back-up beneficiary, and only receives the death benefit if the primary beneficiary dies before receiving the money. But if your child is still a minor, somebody else will still look after the money until they reach adulthood.
- Nominate a living trust. This option allows you the most control over your life insurance benefit, although it’s also the most complicated to set up. With a living trust, you’re creating a legal entity that serves as the hub for all of your finances, including your life insurance benefit. You’ll still have to designate a custodian to carry out your wishes, but you can specify how much, to who and when the money is spent.
How to buy life insurance for a child
While ensuring financial protection for your child, you may consider buying them their own life insurance policy. However, this serves a different purpose and can be far less complicated. There are two important reasons why you may want to buy your child a life insurance policy:
- Future gift. Buying a whole life insurance policy for your child and paying it off before they reach adulthood gives their future family a valuable gift, in addition to giving your child cash value they can use later in life.
- Proper goodbye for the unthinkable. Having a policy in place can provide you with the funds to properly bury your loved one if the unthinkable happens.
Buy your child a life insurance policy in two main ways:
- Add a rider to your policy. Many life insurance companies offer a child rider. It’s usually offered for benefits of $10,000 or $20,000 that payout a lump sum if your child passes away. However, it can be converted into a whole life policy once they reach age 26 and can often be increased to up to 5x that amount, without the need of a health exam.
- Buy a separate whole life policy. If you want to buy your child a policy that’s worth over $100,000, then you’ll need to buy a separate whole life policy. Purchasing a policy while they’re young makes it more affordable — compared to buying a policy as an adult.
Buying a life insurance policy for your child might not make sense if you can only invest in one avenue for them, such as a college education. But if you have the funds, buying your child a policy now can be a valuable gift for them and their family later in life.
Ensuring your loved ones are taken care of financially after you die is the primary purpose of life insurance. But if your loved ones are minor children, it’s more complicated. You can designate your minor child as a beneficiary, but the money will likely be in the hands of a custodian until your child reaches adulthood.
Before buying a policy, compare life insurance companies to find the one that suits your needs best.