Can minors be beneficiaries on life insurance?

One of the many purposes of life insurance is to provide for your children if you pass away while they are still dependents. By purchasing a plan with a sufficient death benefit, you can give your children the gift of financial stability so that they can still live comfortably and replace the income that you were once earning to pay for common living expenses. Life insurance can also become a great financial vehicle that will help minors in the future when they can fund their savings accounts after their guardian has covered to necessary expenses. Start comparing life insurance rates now by using our FREE tool above!

There is no denying that parents should have some form of life insurance coverage to protect their young children who are dependent on their financial support. Many people focus on choosing the right type of insurance or the right death benefit but overlook how important personalizing your policy with the proper structure is.

There is often confusion for parents who are buying insurance as to who they should leave the death benefit to. Their children are not yet 18, so designating hundreds of thousands of dollars to someone who cannot yet hold their own bank account may not seem realistic even when the purpose of buying coverage is to protect the child. Naming a minor child is an option, but leaving proceeds directly to your children could be a major beneficiary mistake. If you would like to learn just how to name your minor children the right way so that they can benefit from your death benefit.

Why Parents Should Not Directly Name Minor Children

Life insurance companies cannot pay the proceeds of life insurance directly to a minor child because they have not yet reached 18. The reason for this is because minors cannot handle their own legal affairs, and receiving a payout is a legal affair.

• Setting Up a Court-appointed Guardian

They must have someone who can manage their money and their financial affairs, and when there are no parents this can create issues. There is an option for the court to appoint a guardian, but this can get expensive and will lead to severe delays. No matter what the issue, when a minor is named for benefits, the beneficiary cannot control their proceeds until they reach the appropriate age in their state (between 18 and 21).

• Making Minor Ineligible for Benefits

In many cases, when a dependent has a parent pass away they could be eligible for government benefits and assistance. Unfortunately, the Federal law says that children who are disabled or who suffer from special needs will not qualify for the benefits that they are entitled to when they receive an inheritance, gift, or life insurance proceeds that exceed $2000. To avoid affecting your child’s potential to receive income, you should set up a trust with a trustee that you trust.

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How Parents Can Designate Minors As Beneficiaries

There are several different alternatives to naming children under 18 as beneficiaries. If you want to be sure that the people that you leave behind do not encounter problems to collect on your life insurance, here are some of the ways that you can be sure that your little ones will get the benefits you bought just for them to receive:

• Designating a Testamentary Trust

If you have a Will, the terms in your will can be written so that you can set up a testamentary trust. This trust that is created within your Will can designate how your life insurance will be funded once it is time to file a claim. The named trustee at the time of death, which can be a minor, will take control of property and assets and will become the beneficiary of payouts for vehicles like life insurance or annuities. You can decide if all or just some of the assets will transfer to your child.

While this is a better option than naming a minor directly, there are still potential problems when you set up a testamentary trust. One of the major problems is that this trust will go through probate, which can be a lengthy process. If there are issues with the Will and it is deemed invalid, this poses problems for the named beneficiary. You should seek legal advice when you are setting this up to prevent costly errors.

• Designating Minors with a Uniform Transfer to Minors Act Custodian

In most states minors cannot enter into contracts. Because of this, parents must transfer their assets to a trust or perhaps a custodial account. To help prevent some of the complications that arise when minors are gifted securities or left property, the government has passed the Uniform Transfer to Minors Act (UTMA).

The UTMA says that minors can own property and assets accrued in an inheritance as long as a custodian is selected and a custodial account is established.

The custodian that is selected will become the trustee and must be listed with their full name and social security number. When a death benefit is paid, the money is paid to the custodial account (trust) and will be controlled by the named custodian until the trust terminates. This is typically when the minor becomes an adult who can legally be a party in a contract within the state. This is a great option because restrictions can be placed on how the custodian can use the money, but the restrictions will be erased when the minor is an adult.

• Setup and Designate a Living Trust

If you are looking for a trust option that will offer you the greatest amount of inflexibility, the living trust is the option to consider. By first establishing your living trust and then designating the living trust as a beneficiary, you can avoid so many different issues that come with having proceeds go to your minor children. When you have a living trust, you can leave instructions on how you want your property managed and how the inheritance should be controlled until the children in question become adults.

A major advantage of choosing to name a property guardian in a living trust is that your estate will bypass probate when you have a living trust. In addition to bypassing probate and avoiding estate taxes, you will have peace of mind in knowing that you can leave very specific instructions on how the money can be handled even after your child reaches adulthood. To some, the idea of an 18-year-old controlling $500,000 can be scary. This gives you some power on when and how the money can be spent.

Common Mistakes When Leaving Children an Inheritance

Naming your 10-year-old directly is not the only way that you can make a mistake when you are trying to do the responsible thing as you structure your life insurance. There are improper methods to designate a life insurance inheritance to minors that can really affect their financial future when you do not know the consequences. Here are two big mistakes and what the consequences might be:

• Designating Your Estate Without a Specific Beneficiary

When you have a beneficiary, you are naming a person or an entity that is supposed to receive the benefits that you have been paying for. Some may think that naming their estate is best, but naming an estate as the entity or the person that is to receive the death benefits can pose problems because creditors can come after those funds before the executor of the estate can touch them.

The money is also subject to probate taxes, administrative fees, and other attorney fees that will eat up the benefit.

It almost defeats the purpose of buying life insurance once all of the fees are taken. Be sure that you have a trust or a custodian listed. You should also have a contingent beneficiary just in case the people selected as custodians do not outlive you. If there is no listed beneficiary the same problem arises.

• Naming an Adult that You Trust

Naming a relative or a friend to hold the proceeds or put them into savings vehicles for your children can be a huge mistake. There are so many different scenarios where there could be disasters as to where the money will be spent or whether or not creditors will intercept the funds. No matter how tempted you are or how much you trust that individual, this is not the way that you should handle leaving money to a minor. Instead of doing this, consider naming a custodian or setting up the best trust.

Now that you know how the life insurance should be structured it is time to select the best type of policy. You should review the pros and cons of both term and permanent insurance and then make your decision. Once you know what you would like, compare the rates through several companies online with an instant rate comparison tool and then you can start the application process. Start comparing life insurance rates now by entering your zip code in our FREE tool below!

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