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 a policyholder name their spouse or partner as the primary beneficiary. And, often, their child or children are listed as contingent beneficiaries.
When naming a minor as a beneficiary, 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 proceeds 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 until the child comes of age. 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 funds from being utilized the ways you envisioned.
So, how can you overcome this obstacle to ensure that your minor children receive the payout?
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List a custodian
You must assign a custodian for the kids. In our application process at Haven Life, if you designate a minor as a beneficiary, we require a custodian to be named in order to complete your application. It’s a common practice in the life insurance industry.
A custodian serves as the guardian of the 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. 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 proceeds until your child reaches the age of majority.
But, a naming a custodian is not your only option for streamlining the “what if” scenario of your child receiving a life insurance payout…
Name a guardian as a contingent beneficiary
If you’re not 100% sure about naming your child as a beneficiary, consider naming the child’s guardian.
When you create a will, it’s best practice to indicate who would be the 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 (co-parenter) as the primary beneficiary and then the guardian as the contingent beneficiary.
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 a house, life insurance, retirement plans and more.
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.
A key benefit of a living trust is that it helps 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, beneficiaries often need to go to probate court to ensure that it is executed correctly.
When applying for a life insurance policy, you can list the trust directly as a primary beneficiary.
Making 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, it’s important to take the proper steps to ensure the money is used in exactly the way you intended it to be. And remember: the very friendly customer support team is just a chat, email or phone call away if you want someone to proofread your beneficiary work.
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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 (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.