All parents worry about what would happen to their children if something happened to them. Many people purchase life insurance to provide for their children, and it may seem like a natural choice to name them as beneficiaries on a life insurance policy. However, if you have minor children, choosing beneficiaries for your life insurance policy isn’t a minor issue. Here are a few issues to consider:
If you pass away while your children are underage, many jurisdictions will not allow an insurance company to pay them the proceeds directly. Instead, a guardian will need to be appointed to administer the money for the child’s benefit until he or she reaches legal age. Appointing a guardian can be expensive and time-consuming and may delay and reduce the money that goes to your children.
If your child has special needs, there are other reasons to consider carefully before naming them as direct beneficiaries. For example, a life insurance payout or inheritance might jeopardize any government assistance or other needs-based support he or she might be eligible to receive.
What can parents do to protect their minor children?
One possible solution is to set up an account with the insurance company under the Uniform Transfers to Minors Act (UTMA). Parents appoint a custodian who will manage the assets for the child’s benefit until he or she reaches the effective age of majority in the state under which the account was established – typically 18 or 21.
You can also create a trust to receive life insurance proceeds and make your children beneficiaries of the trust. Trusts are much more flexible, and you can determine when and how your children receive money. While a trust is a much more complex option, it may be a wise decision if you are worried about leaving young adult children in control of large sums of money.
There are a number of tax, legal, and financial implications to consider when creating strategies for minor children. We strongly recommend that you discuss your options with legal and financial professionals who understand your personal situation. As insurance professionals, we work closely with our clients to help them make the best choices possible and draw upon the expertise of a network of attorneys and other experts when necessary.