Life insurance is a critical part of family financial planning, ensuring that your loved ones are taken care of financially when you're no longer around. A common approach many parents consider is adding their child's name as a life insurance beneficiary, believing it to be a straightforward way to secure their child's future. However, this decision carries unexpected complications and risks that many are unaware of.

Is Adding My Child as a Beneficiary a Good Idea?

At first glance, naming your minor child as a beneficiary on your life insurance policy seems like a caring gesture. It's natural to want to provide for your children's future directly. However, this well-intentioned move can lead to unforeseen legal and financial hurdles.

Why Can't My Child Directly Receive the Life Insurance Money?

Minors are not legally allowed to receive life insurance benefits directly, says Policygenius in an article titled “Naming a child as a life insurance beneficiary.” If a minor is named as a beneficiary, the death benefit payout is delayed until a court appoints a custodian to manage the funds, which can take months. The surviving parent or a guardian named in your will is often appointed as the guardian. During this time, your child would not have access to the financial support you intended, potentially impacting their immediate needs.

What Happens to the Insurance Policy Payout if a Minor is Listed as the Beneficiary?

Once an adult custodian is appointed, they can only use the money for court-approved expenses, such as living expenses and education. Your child might only access the funds at age 18. This process delays support and limits how the funds are used, contrary to your wishes.

Why is Naming a Trust as a Beneficiary a Better Option?

Setting up a trust is the best way to ensure that your child benefits from your life insurance policy without legal entanglements or delays. Creating a trust for your minor child allows you to control how and when the benefits are distributed. You can specify conditions, such as funds for specific types of education, vacations, or an allowance, ensuring that the money supports your child in the most beneficial ways. This setup avoids the need for court intervention, providing a smoother transition of financial support.

Can I Choose an Adult Custodian Instead of Using a Trust?

While not all families choose to create a trust, naming an adult custodian or guardian for minor children is an essential step for estate planning. Appointing a guardian ensures that the person(s) you choose will both raise your children according to your wishes and financially manage the insurance policy death benefit on behalf of your child until they reach adulthood. Selecting a trusted individual for this role is crucial, since they will have significant control over your child's financial and caregiving support.

Are there Other Considerations when Choosing Life Insurance Beneficiaries?

Naming your spouse as the primary beneficiary, with a trust as the secondary, ensures that your spouse can manage household finances and support your child's future if you're no longer there. It's essential to regularly review and update your life insurance beneficiaries to reflect life changes, ensuring that your policy aligns with your current wishes.

Conclusion

Adding your child's name as a life insurance beneficiary might seem like a simple way to secure their future. However, it introduces complications. By considering alternatives, like trusts or adult custodians, you can ensure that your child receives the support you intend without unnecessary legal hurdles or delays.

Key Takeaways

• Legal Limitations: Minors cannot legally receive life insurance benefits directly. If they are listed as a beneficiary for a policy upon the death of the policyholder, it could lead to delays and complications in your child receiving the policy payout.
• Trusts as Solutions: Setting up a trust for your minor child and listing the trust as the life insurance beneficiary allows you to control how and when the benefits are used, bypassing legal hurdles.
• Adult Custodians: Naming an adult custodian or guardian for minor children who can manage the funds for your child until they reach adulthood and provide caregiving is an essential part of estate planning to protect your children.
• Beneficiary Updates: Regularly updating your life insurance beneficiaries is crucial to reflect life changes and ensure that your wishes are met.

Reference: Policygenius (Aug. 17, 2023) "Naming a child as a life insurance beneficiary"