Can minors be beneficiaries on life insurance?

How to ensure life insurance proceeds go to your minor children

People buy life insurance for many reasons, but for parents, providing for children is often near the top of the list. Naturally, we want our children to be financially secure if something should happen to us.

If caring for your children is one of your main concerns, you may want them to receive your life insurance benefit..

Technically, you could name your minor children as beneficiaries. But it is generally not advised.

Parents can achieve their life insurance goals without naming their minor children directly as beneficiaries, and that's usually for the best.

Here are a few points to consider as you make decisions about your life insurance beneficiary.

Why would parents want their life insurance left to a minor?

Naming their child as their beneficiary feels like the right thing to do for many parents, especially for single parents or if caring for their minor children or leaving an inheritance is their primary goal. Or maybe you want the proceeds to go toward accomplishing education goals.

When you buy insurance, you have the option of naming a minor as either the primary or contingent beneficiary.

For example, if you're married, you could list your spouse as the primary beneficiary and your kids as the secondary. That may seem like a no-brainer on the surface. But there are still important considerations.

When a child is named the beneficiary

The age at which a beneficiary gains control of funds varies by state and by the arrangement used. It is often 18 or 21, but UTMA statutes in some states permit custodianship to continue longer. If you were to die before then, the insurance company would not be legally allowed to release the funds directly to a minor.

This is the case whether your child is the primary beneficiary or is named as the secondary beneficiary and becomes the primary due to the original primary dying before or at the same time as the insured.

So, what happens when the insurance company doesn't pay the benefit right away?

You'd need to have named someone to act as your children's custodian until they become of age. Here's a crucial point: If there is not a legally appointed custodian in a life insurance claim, a court may need to appoint a guardian, conservator or similar fiduciary to manage the funds for the child.

Not only could the result be against your wishes, but it could also tie up the funds needed for essential expenses.

How can I leave my life insurance to a minor child?

If you want your life insurance proceeds to go to your children, you have several options for ensuring the funds are managed on their behalf until they reach adulthood.

Name your child as the beneficiary, with a designated custodian to manage the assets.

This is often the simplest solution. When you buy life insurance, name an adult you trust to be the custodian for the assets intended for your minor child. The custodian would manage the assets on your children's behalf until they reach the age specified by state law.

In addition, you can name a legal guardian for your minor children in your will. While the custodian manages the financial assets, the guardian is responsible for the care and upbringing of your children if you pass away. Naming both a custodian and a guardian helps ensure your children are cared for by the individuals you trust and that their financial resources are properly managed.

If you do not name a custodian, the courts will do this for you, but you run the risk of having them name someone you wouldn't choose. For example, maybe you're a single parent. Depending on state law and the circumstances, a court could appoint the other parent or another qualified adult to manage the funds. While you may be comfortable with that parent making basic decisions, you may not want them managing life insurance assets.

Using a UTMA or UGMA account

If you want to name your minor child as a beneficiary with a custodian to manage the assets, your options depend on your state. States generally provide a statutory way to transfer assets to minors through either the Uniform Transfers to Minors Act (UTMA) or, in some states, the Uniform Gifts to Minors Act (UGMA).

Most states started with UGMA. But many have replaced UGMA with UTMA because UTMA lets more types of property pass to minors.

UTMA allows any kind of property, real or personal, tangible or intangible, to become a custodial gift. It also permits transfers from trusts, estates, guardianships and other third parties indebted to a minor without a conservator.

If you decide on this route, you can establish a UTMA account through an eligible financial institution and structure the beneficiary designation accordingly. You can then name an adult custodian to manage the funds in the UTMA until the child reaches age of majority.

For example, you could name your beneficiary as “John Doe as custodian for the benefit of Mary Smith under the (minor's resident state) UTMA.”

If the UTMA or UGMA designation is properly established and accepted by the insurer, court appointment of a guardian may often be avoided. Consult a legal professional to ensure proper titling.

Name a trust as the beneficiary.

Although it can be costly, you could consider a revocable living trust. It can provide you with the flexibility needed to manage your life insurance proceeds.

You can modify the trust as time passes, so as your children age, the parameters you set for how to manage and distribute the money can be updated.

The bottom line

Because life insurance is there to protect your family should something happen, it's important to select your beneficiary with care. Naming your minor child directly may not be the best way to provide for them after you’re gone. Be sure to think through all your options and seek legal advice for complex scenarios.