When you name a minor child as the beneficiary of a life insurance policy, several important considerations and potential complications can arise. Here’s what you need to know:

1. Minors Cannot Directly Receive Insurance Proceeds

Under most state laws, minors (children under the age of 18 or 21, depending on the state) cannot legally receive or control large sums of money, including life insurance proceeds. If a minor is named directly as a beneficiary and you pass away while the policy is in force, the insurance company cannot pay the benefit directly to the child.

2. Funds are Typically Held Until the Minor Reaches Legal Age

If a minor is the designated beneficiary, the life insurance company may hold the proceeds until the child reaches the age of majority. In some cases, a court-appointed guardian may be required to manage the funds on behalf of the child until they come of age. This process can be time-consuming and expensive, as it involves legal fees and court supervision.

3. Court-Appointed Guardianship

If no other arrangements are made, the court will likely appoint a guardian to manage the insurance proceeds for the minor. The guardian is responsible for handling the funds in the child’s best interest but must also provide regular reports to the court about how the money is being managed and spent. This process can be costly and may lead to delays in accessing the funds when they are needed most.

4. Establishing a Trust for the Minor Beneficiary

To avoid complications, many people choose to establish a trust for their minor children and name the trust as the beneficiary of their life insurance policy. A trust allows you to appoint a trustee who will manage the insurance proceeds on behalf of the child according to the terms you set. This arrangement gives you control over how and when the funds are used, such as for education, health care, or other needs, even after the child reaches adulthood.

5. Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) Accounts

Another option is to name a custodian under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) to manage the insurance proceeds. This method allows an adult (the custodian) to hold and manage the money for the minor’s benefit until they reach the age of majority. However, unlike a trust, the child gains full control over the funds once they reach the specified age (usually 18 or 21).

6. Potential Risks of Direct Beneficiary Designation

Naming a minor child directly as a beneficiary can result in several potential risks:

• Lack of Control: Once the child reaches the age of majority, they gain full access to the funds, which might not align with your intentions, especially if you want the money used for specific purposes (like education).
• Court Delays and Costs: Court involvement can delay the availability of funds and increase costs due to legal fees.
• Risk of Mismanagement: If a court-appointed guardian is required, there is a risk that the funds may not be managed as effectively or efficiently as you would have preferred.

Plan Ahead to Protect Your Child’s Interests

To avoid complications and ensure that the life insurance proceeds are used in the best interest of your minor child, consider creating a trust, designating a custodian under the UTMA/UGMA, or consulting with a legal or financial advisor to explore the best options for your situation. This careful planning can help protect your child’s future and provide peace of mind that your intentions will be honored.

If you have questions about naming your beneficiary or setting up a trust, it is best to contact your attorney or find an attorney who is local as laws may vary from state to state.

For more information about life insurance, to request a quote or to help with beneficiary designations, contact Set for Life Insurance today!