Can a Minor Child Be a Beneficiary of a Life Insurance Policy?

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Can a Minor Child Be a Beneficiary of a Life Insurance Policy?
Fact Checked by
Chris Riley

Co-Founder and CEO of USA Rx

Last Updated on April 27, 2021

As a parent of a child, or multiple children, you truly understand how important life insurance is to your family.  Life insurance is one of the most valuable financial products you’ll ever own.  In the event of an untimely death, you’d absolutely want to make sure your family is protected, and could maintain their current standard of living.  While having a life insurance policy in force is important, having your beneficiaries properly listed on said policy is just as important.  Listing a minor child as a beneficiary is not a wise decision, in our opinion.

Most parents are already fairly knowledgeable about what it means to name a child as a beneficiary. In fact, the topic is commonly discussed with friends and family members when the topic of life insurance comes up. After all, what parent wouldn’t want their child to take care of themselves if anything happened to them? But there are some nuggets of information about naming a minor child as a beneficiary of a life insurance policy that many parents are unaware of.

To assist you in your endless endeavor to ensure your family is safe and well-cared for in the event of an unfortunate situation, we’ve compiled a list of the best suggestions and questions to ask yourself as you name your child as a beneficiary. Hopefully, it will help you to make a better-informed decision.

Understanding the True Meaning of Beneficiary

Under the complex legal system in the United States, a beneficiary is essentially the person or entity to whom any funds are awarded in a will or trust. It is the person or entity who will eventually inherit all or part of the estate or insurance after a will, or trust is admitted to probate court.

As such, beneficiaries must be aware of their responsibility as the person responsible for any monetary decisions made with respect to any assets. Not only that, but beneficiaries have to be able to demonstrate that they are capable of making decisions related to the assets they receive from the will or trust. This often leads to a question that most parents are afraid to ask: “Can a minor be a beneficiary?”

 

In the Eyes of The Life Insurance Companies

As you know, minors typically have someone appointed to be the responsible party with respect to all financial and legal decisions they make. The same holds true when it comes to life insurance policies. Most insurance companies will have language in their policies that stipulate that anyone who is a beneficiary must be over the age of 18 and, therefore, considered an adult. This is why most parents choose to name an adult as the beneficiary instead of a minor.

And though you can certainly name your child as a beneficiary, you will be providing the insurance company with a loophole that they can use to refuse payment in the event of death. When such an unfortunate situation occurs, the insurance company will be obligated to make payments, but only to the legal guardian or person who is designated as the child’s guardian.

In the Eyes of The Court

The court system in the United States is based on the principles of the “best interest of the child.” In other words, the courts will take all information into account and make a decision with respect to what is in the best interest of the child. This determination is made on a case-by-case basis and will be determined by the judge based on information that has been presented. Some of the factors that may influence the determination include the maturity level of the child, their ability to make mature decisions, their proximity to family, and their overall relationships with their parents. Essentially, the court is trying to determine whether or not the child will benefit from the information that is presented to them. If the judge decides that it is in the best interest of the child, then the judge will name a person who will serve as guardian and conservator over the child’s financial affairs until they reach adulthood.

 

Should You Name a Minor a Beneficiary?

NO. AARP, a well known life insurance resource to families states: “If minor children have been named as the beneficiary of your life insurance policy, then it can become legally complicated.  Minor children cannot directly receive the proceeds of a life insurance policy. Instead, the state would appoint a legal guardian if you hadn’t done so, which is a lengthy and costly process. That guardian would then determine how the money is managed and spent—and it may not coincide with your wishes.”

The most important thing to keep in mind when naming a child as a beneficiary is that you are providing the insurance company with a loophole that they can use to refuse payment in the event of death. The court system will most likely act in the best interest of the child and place the child under the care of an adult, but that takes time, money, and energy.

In the meantime, your family will be left without the benefit of the life insurance you had hoped to provide for them. So instead of risking the benefits that life insurance can provide for your family, consider these:

  1. Name Someone Trusted as Beneficiary:

Unless your child is old enough to manage his or her own finances, it is likely that someone else will have to act as trustee or conservator for the minor. Parents should try to name an adult who is trustworthy and familiar with the family in order to minimize any possible future problems.

  1. Use Living Trust:

If you are unable to name an adult as the beneficiary for your child, then you can use a living trust to address this issue. A trust will be treated as if you are still alive, meaning that there is no loophole, and your family will receive the life insurance benefit.

  1. Use a UTMA/UGMA:

When a child is named as a beneficiary, the insurance company will often require that the child be placed under the care of an adult guardian who will have the ability to make financial decisions for the child. To avoid this, you can use a UTMA/UGMA account to ensure that you have someone designated to care for your child in the event of death. However, keep in mind that a UTMA/UGMA account is not considered trust and is, therefore, less protected than trust from creditors.

  1. Name Your Child as a Contingent Beneficiary:

While this is not the best course of action to take with respect to naming a child as a beneficiary, it is certainly one that can help you avoid naming an individual who will take on the responsibility of guardian. A contingent beneficiary is someone who will only receive benefits if someone else has not already received them. This can be a helpful option when you want to ensure that your family receives the benefit of the insurance money while at the same time ensuring that your child is not placed under the care of a legal guardian.

Understanding UGMA

A UGMA or Uniform Gift to Minors Act account is essentially an investment account that can be used to name a child as a beneficiary of a life insurance policy. For example, if you name your son as the beneficiary of a $10,000 UGMA account, it means that your son will receive $10,000 at the age of 18.

Understanding UTMA

A UTMA or Uniform Transfer to Minors Act account is essentially an investment account that can be used to name a child as a beneficiary of a life insurance policy. It is more secure than a UGMA because it protects the assets until the child reaches the age of 18. During that time, the child’s assets will be protected from creditors and predators.

 

Who to Name as a Beneficiary if You’re a Single Parent?

You’re a single parent, and you’ve decided to get life insurance. You don’t want to leave your children without financial support. You want to make sure they’ll be taken care of, and it’s possible for you to keep the policy in place even after you pass away. But that also means that you’ll need to name a beneficiary. But who should you name as the beneficiary? Your ex-spouse? Your parents? Maybe someone else entirely? Well, who you choose depends on the circumstances.

While naming your child as the beneficiary on your life insurance policy is certainly a viable option, there are risks associated with doing so. After all, a minor cannot be a beneficiary on their own. So, if you’re trying to name your child as a beneficiary, you’ll also need to name someone who will be responsible for making decisions with respect to the money received from the life insurance policy. So, considering naming someone you truly trust to care for your child as a minor is definitely an option worth considering. Someone who knows you and your child and will have no trouble doing everything necessary to make sure your child is taken care of.

 

Conclusion

Getting life insurance for your children is important, but it’s also important to understand the risks associated with naming a minor as a beneficiary. Life insurance is designed to help your family in the event of your untimely death. As such, it’s important to have the necessary provisions in place to ensure that your family is taken care of and protected. By adding a minor as a beneficiary, you are giving your family a loophole that the insurance company can use to refuse payment and put your family in a very difficult financial situation.

So instead of putting your family at risk, try to avoid naming your child as a beneficiary by naming someone else who is responsible and trustworthy enough to take on the responsibility of making decisions with respect to the life insurance benefit. After all, nobody likes to leave behind someone who can’t handle their finances, but unfortunately, the system in place will often force this outcome. So why not make sure that someone you trust and know will be able to handle things?

If you’re having trouble deciding who you should name as a beneficiary, consider a living trust. The trust can help you avoid naming your child as a beneficiary, and instead, you can use it to ensure that your family will be taken care of even after you’ve passed away. All you have to do is complete the application process for the living trust and specify that your life insurance policy is one of the assets that will be held in the trust.

Be wise in making these important financial decisions.  If you are unsure of who to list as a beneficiary on your life insurance policy, speak with a professional such as an attorney or financial planner.  Do not feel that you have to make a decision like this on your own.  It’s always a wise decision to work with a team of professionals, to make sure your family is protected exactly the way you’d like them to be.

If needing assistance to find life insurance with type 2 diabetes, type 1 diabetes, or gestational diabetes, we’re here to help.  Simply complete a quote request, or contact us, and a licensed agent will reach out to assist.  We understand finding life insurance with a chronic illness can be frustrating at times.  Don’t let it be.  Reach out and let a licensed agent help you find the best life insurance policy.

 

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