When applying for life insurance online, you’ll be asked to name a beneficiary for your policy. This is an important step in the buying process because properly naming a beneficiary and providing their contact information is key to helping ensure that a life insurance payout is received in a timely manner.
While choosing and naming a beneficiary is pretty straightforward, it’s important to ensure it’s done correctly. At Haven Life, it’s common to see an insured policyholder name their spouse or partner as the primary beneficiary. And, often, their child or children are listed as contingent beneficiaries. That way, their children will be provided for in the case of their accidental death.
When you list your child as a minor beneficiary of life insurance, some complications can arise that are important to understand and prevent. For one, if you were to die before the child is legally an adult (as deemed by his or her state of residence), then he or she would not be able to receive the death benefits directly.
If you’re thinking of naming a child as a beneficiary, here’s what you should know.
What happens when you name a child as a beneficiary?
A child may be one of the first people to come to mind when naming beneficiaries. If you’re a parent, your little one is probably one of the primary reasons you are buying a policy. (No offense to your spouse or anything.) You want to leave them a financial legacy to make their lives easier.
However, if your children are still minors, you need to take additional steps if you choose to name them. A life insurance company will not release a policy payout to a child who has not reached the “age of majority” (typically 18 or 21 depending upon the state).
If a minor becomes the beneficiary of a life insurance payout, then the decision regarding what to do with the proceeds is in the hands of the probate court. There, they will name a guardian for the minor’s estate, and the guardian retains oversight over the estate and its money until the child reaches the age of majority. It’s not an ideal scenario because there are fees associated with the court overseeing the distribution of assets. The process and its associated costs could prevent the money from being utilized the ways you envisioned.
So, how can you overcome this obstacle to ensure that your minor children receive the payout?
List a custodian
You must assign a custodian for the kids. In our application process at Haven Life, if you designate a minor beneficiary of life insurance, we require a custodian to be named in order to complete your application and set up the life insurance policy. It’s a common practice in the life insurance industry, as minors are not allowed to be listed as direct beneficiaries.
A custodian serves as the guardian of the money and assets intended for the minor child, making way for valid transfers under the Uniform Transfers to Minors Act. A properly designated custodian may make decisions concerning those assets so long as the choices are in the best interests of the minor child. Once the child becomes of age, the assets are turned over to him or her, and the custodian no longer has a role to play.
As an example of how this might work, say you are a single parent and decide to name your child as the primary beneficiary on a life insurance policy. When asked to name a custodian, you list your older sister because she would be your child’s guardian if anything happened to you. Your sister would then be in charge of financially managing the life insurance proceeds until your child reaches the age of majority.
In some cases, parents choose to identify a personal guardian for their child (that is, a person who will care for the child in the case of the parents’ death) and a property guardian for the money and other assets the child will inherit in the future. Parents do this because they might have a family member who is very good with money but not as good with children or vice versa. When you list children as beneficiaries on your life insurance policy, consider whether you need both a personal guardian and a property guardian. If you choose both options, the property guardian should be listed as custodian.
But naming a custodian as part of your beneficiary designation is not your only option for streamlining the “what if” scenario of your child receiving life insurance benefits.
Name a guardian as a contingent beneficiary
If you’re not 100 percent sure about naming your child as a beneficiary on your insurance policy, consider naming the child’s guardian.
When you create a will, it’s best practice to indicate who would be the legal guardian of your children if something happened to you and/or your partner. Often, this person is either your parent, a sibling or close friend. If you have already had those important conversations with your family and designated this important person in your will, consider making them the contingent — or backup — beneficiary.
The way this works is you would list your spouse or partner as the primary beneficiary on your policy and then the legal guardian as the contingent beneficiary. The guardian will receive the money if all primary named beneficiaries are dead, either in a lump sum or in installments, and can use that money to raise your children into adulthood and provide for their future.
Name a living trust as beneficiary
Another way to avoid the potential challenges of naming a child as a beneficiary is to name a trust instead.
A revocable trust, also known as a living trust, is a popular estate planning tool that you can use to indicate who will receive your assets when you die. Assets held within a trust are commonly things like money, a house, life insurance, retirement plans and more. A trustee manages the trust and ensures the correct individuals receive their benefits in the event of your death. (You may also need to work with an attorney to ensure that all of your existing assets from various financial institutions are included in the trust.)
The “living” and “revocable” in this trust’s name refer to the fact that you can adjust which assets are in the trust and who the beneficiary is as your circumstances or wishes change. Knowing that you can work with a trustee to add or remove assets or make a change to beneficiary designations over time can give you peace of mind.
You can also create an irrevocable life insurance trust if you’d like to reduce estate taxes and leave a larger inheritance for your loved ones. Unlike revocable living trusts, an irrevocable trust cannot be adjusted after it is created (unless you have permission from the beneficiary), so think carefully before you decide how your money and assets will be distributed. Talk to a financial advisor to learn which type of trust might be best for you, and how to identify a trustee to help you complete the process.
Another key benefit of both of these trusts is that they help your heirs avoid probate court and its associated expense and inconvenience. Probate is a court proceeding where your assets are distributed according to your wishes. Even with a will or testamentary trust, beneficiaries often need to go to probate court to ensure that it is executed correctly. This takes time and money that can be avoided by setting up a revocable living trust or an irrevocable trust in advance.
When applying for a life insurance policy, you can list your trust directly as a primary beneficiary.
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Read moreMaking life less hard for minor beneficiaries
You purchase life insurance to financially protect the people you care about the most. And, you want those great intentions to be achieved as simply as possible. When naming a minor as a beneficiary on your policy, it’s important to take the proper steps to ensure the money is used in exactly the way you intended it to be. At Haven Life, you can be confident that the very friendly customer support team is just a chat, email or phone call away if you want someone to proofread your beneficiary work or help you understand the beneficiary designation form.
Rachel Parisi is a freelance writer and attorney. She focuses her writing on insurance, financial services, and employee benefits. In her previous life, she served in the United States Air Force as a missile combat crew commander. Opinions are the writer’s own.
Haven Life Insurance Agency, LLC (Haven Life) is backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual).
Haven Life does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
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