Can minors be beneficiaries on life insurance?

People buy life insurance for many reasons, but for parents, providing for children is 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, there's a good chance you want them to receive your life insurance benefit.

“Technically, you're allowed to name your minor children as beneficiaries,” says Matt Lyon, USAA advice manager. “But you should be cautious before doing so.”

According to Lyon, parents can achieve their life insurance goals without naming their minor children as beneficiaries — and that's usually for the best.

Read on for a few points to consider as you make decisions about your life insurance beneficiary.

Why parents may want their life insurance left to a minor

This feels like the right thing to do for many parents — especially if caring for their minor children is their primary goal. “Maybe you want the proceeds to help maintain your family's financial lifestyle, stability and go toward accomplishing education goals,” says Lyon.

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

“For example, if you're married, you could list your spouse as the primary beneficiary and your kids as the secondary,” he says. “That seems like a no-brainer. But there are still important considerations even when minor children are named as contingent beneficiaries rather than primary beneficiaries.”

When a child is named the beneficiary

Your state of residence designates when a minor has reached what's called their age of majority — usually 18 or 21 — and can receive a life insurance benefit. If you were to die before then, the insurance company would not release the funds to a minor.

This is the case whether your child is the primary or secondary beneficiary.

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,” says Lyon. “Here's a crucial point: If there is not a named custodian in a life insurance claim, the court will name a guardian through the probate process.”

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

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

If you want the proceeds of your life insurance to go to your children, you can choose from the following alternatives.

Name an adult custodian as the beneficiary.

This is the easiest solution. When you buy life insurance, name an adult you trust to be the beneficiary. That person would control the assets designated for your kids until they are of age.

“This is what the courts will do, but you don't run the risk of having the money go to someone you wouldn't choose,” says Lyon. “For example, maybe you're single parent. It's likely the court would appoint the child's other natural parent as their legal guardian. While you may be comfortable with that parent making basic decisions, you may not want them managing life insurance assets.”

You could avoid this outcome by naming a custodial guardian to receive your life insurance benefits. That person would be in control of the assets on behalf of your child.

If married, it's important to think beyond your primary beneficiary choice. While your spouse might be the obvious choice for a primary beneficiary, you can consider a custodian for the secondary beneficiary.

Name a trust as the beneficiary.

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

“You adjust the trust as time passes,” says Lyon. “So as your children age, the parameters you set ahead of time can state how to manage and distribute the money.”

Consider an UTMA or UGMA account.

Every state has adopted legislation designed to provide a simple, economic way to make monetary gifts to minors.

Depending on the state, legislation is known by the following two titles:

• Uniform TRANSFERS to Minors Act (UTMA), or
• Uniform GIFTS to Minors Act (UGMA).

Most states started with UGMA. But the majority of states have replaced UGMA with UTMA because UTMA permits more types of property to pass to minors.

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

With both of these accounts, the property must go to children when they reach the authorized age.

If you decide on this route, you can set up an account with a financial services company, including your life insurance provider. You can then name an adult custodian to manage the funds in the UTMA until the child reaches age of majority.

Most insurers cannot pay policy proceeds to a surviving parent until the insurers receive court-approved documentation of guardianship that names the parent as legal guardian. This is time-consuming and often involves incurring legal expenses.

According to Lyon, policyowners can avoid these problems by naming a custodian for the child. "Usually it's the surviving parent, but it can also be a trusted family member, friend or associate," he says, using an example:

To John Doe as custodian for the benefit of Mary Smith under the (minor's resident state) UTMA.

“That's all that's needed to provide for the minor child,” he adds. “No court documents are necessary if established correctly.”

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 may not be the best way to go about it. Be sure to think through all your options and seek legal advice for complex scenarios.