When you take out a life insurance policy, you will need to name a beneficiary. Otherwise, there will be no one to leave your death benefit to. But what happens if you want to leave everything to a minor? Can you do it? Should you do it? And are there alternatives? In this guide, we've got everything you need to know about naming a minor as your life insurance beneficiary.
What is a life insurance beneficiary?
A life insurance beneficiary is a person who receives a payout from the policy if you die. Choosing your beneficiary is important, as this is the person who is in line to receive the entire death benefit from the life insurance coverage.
Your beneficiary likely was one of the primary reasons you got life insurance in the first place. However, choosing one isn't as simple as you might think–state laws and policy rules can impact who you choose to leave your death benefit to.
As a rule of thumb, you should always check the fine print on the terms and conditions with the provider before putting anything down in ink. That way, you can be confident over who is the beneficiary, so there are no complications when it comes to who receives the death benefit.
Why you might want to name a child as your life insurance beneficiary minor
In most scenarios, the person who receives the death benefit is a spouse or partner. This makes sense, especially if you have a family. Leaving the money to your significant other allows them to be in charge of the finances and ensure the rest of the family is looked after.
However, there may be certain situations where you decide to name a minor as the beneficiary. One of the reasons for this could be because you don't have a partner or anyone you feel comfortable leaving the death benefit to other than your child.
It's somewhat uncommon to name minors (someone under 18) as a beneficiary, as they will be left with significant financial responsibility. There are even some legal restrictions in place nationwide stopping adults from doing such a thing. And yet, there are still ways you can ensure that a child receives your death benefit.
How do you name a child as your life insurance beneficiary?
Once you’ve decided on the type of life insurance you want (term coverage or a permanent policy), you’ll be asked to name the beneficiary. To name a child, you’ll need to notify the insurer when signing up for the policy.
If a life insurance provider is happy to name a minor on the policy, you won't have any issues. However, there are some cases where you'll be prohibited from naming a child as the beneficiary.
That's why you should check state laws and see their stance on minors being named on life insurance policies. If there are no state issues and the insurer is happy to name a minor, you can add your child to the policy as the beneficiary.
What happens to the death benefit?
If the worst was to happen and you passed away, your child would, in theory, receive the death benefit. That means they’ll be tasked with the responsibility of handling a potentially large sum of money.
However, it’s not quite that simple, as most life insurance providers aren’t allowed to pay out a death benefit to anyone who hasn’t reached the “age of maturity.” And that age of maturity is 18 in every state apart from Alabama and Nebraska, where it’s 19.
To further complicate things, the death benefit could be given to a court-appointed guardian–which could add a myriad of issues if you didn’t intend for anyone else to be the legal receiver of the death benefit. In the worst-case scenario, the result could be a legal battle that means the money is tied up for years while a resolution is sought.
What about the alternatives to naming a child?
Naming a child as your benefit is an option, but it might not be the best one. Instead, you should explore other potential avenues, which still end up with the minor benefiting from the money you leave behind.
Appoint a guardian
Most states allow a legal guardian to receive payouts on behalf of minors, which means you can appoint someone you trust to act in the best interest of your child. They will manage the childs’ finances until they reach 18, at which point the child will have full access to the death benefit.
Establish a trust
If you don’t have a guardian in mind, there’s always the option of establishing a trust. This can be a smart solution for leaving money to your child and sees you set up a life insurance trust, with the trustee overseeing the funds and distributing the money as you wish.
Name your child as a contingency benefit
When you take out a life insurance policy, you'll need to name a primary and contingent beneficiary. If the primary beneficiary dies before you do, the death benefit goes to the contingent. Most people choose their spouse as the primary, with children sometimes used as the contingent, so their money stays in the family. This will stop your money from going to the estate, which could mean chunks of the death benefit covering things like legal fees and debt payments. However, with a child named in as the contingent, you'll ensure the money stays in the family.
In conclusion: doing it for the kids
Naming your child as the primary beneficiary on your life insurance policy is an option, but you should always aim to leave it with someone aged over 18 first, ensuring they take care of the child and protect the money until the minor is old enough to access it. But even if you did decide to leave it directly to your child, you do have options that will ensure the minor is well looked after if you’re no longer around.