How to Name a Minor as Your Life Insurance Beneficiary

You purchase a life insurance policy to protect your loved ones’ future finances, but the process doesn’t end there. You also need to name them as beneficiaries so they can receive the benefit of the policy when the time comes. In fact, designating a life insurance beneficiary is one of the most important steps you can take to avoid any legal hang-ups upon your passing.

Most often, beneficiaries include spouses, adult children, trusts, or charitable organizations, but there are times when you may want to name a minor child. However, it’s imperative to understand that when a child under 18 is named as a life insurance beneficiary, there will be additional information to address to ensure the proceeds of your policy are managed according to your wishes.

Understanding your options for naming a minor child as your life insurance beneficiary can help you make informed decisions about their financial future.

What Happens If You Name a Minor as a Beneficiary?

As you’re putting your will together, it's important to consider not only who you want to receive the proceeds, but also how and when those funds should become available.

Naming a minor child as a life insurance beneficiary may create complications when it's time to distribute the proceeds if they are not of age at the time of disbursement. In most cases, insurance companies cannot pay life insurance proceeds directly to a minor. Instead, the funds must be managed by someone legally authorized to act on the child's behalf. You will need to determine who this will be and how they should handle your estate if you should pass before your child comes of age.

Although 18 is a common age of majority, some financial arrangements may require funds to be held until age 21 or later. The age at which a child can directly receive the funds varies by state and the method of payment arrangement used. Receiving the life insurance payout as a minor child may require a court-appointed guardian or another legally recognized arrangement. This process can create delays, additional expenses, and complications for the people whose financial well-being you're trying to protect.

Options for Leaving Life Insurance Proceeds to a Minor

If your goal is to provide financial support for your child while ensuring the proceeds are managed responsibly, there are several options worth considering, such as establishing a trust or custodial account.

Establishing a Trust

When you establish a trust and name it as the beneficiary of your life insurance policy, you will identify your minor child as a beneficiary of the trust.

A trust allows you to designate a trustee to manage and distribute the funds according to the terms you establish. This can be especially helpful if you want the money to support your child's needs over time rather than become available all at once.

Different types of trusts offer different levels of flexibility. For example:

Section 2503(c) minor's trust: A trust designed to meet specific tax requirements that generally gives the beneficiary the right to access trust assets at age 21, subject to applicable provisions.
Discretionary trust: An arrangement that allows the trustee to make distributions based on the terms of the trust, which may include the child's health, education, maintenance, and support.

Because trusts vary in structure, requirements, and tax implications, consider working with an estate planning attorney to determine which arrangement best fits your family's needs.

Creating a Custodial Account

Depending on the regulations of your particular insurance provider and state law, another option is to establish a custodial account, such as a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). If a surviving parent wants to collect the life insurance proceeds on behalf of a minor, they will need to petition the court to be named the financial guardian. These arrangements allow a custodian to manage the assets for the minor’s benefit until the child reaches the applicable age for receiving control of the funds.

With a UTMA, money left for a minor is considered a tax-free gift and the child is the owner of the account. A custodian manages the money for the child’s best interest and until they reach the legal age in their home state, at which time the named child can take control of the account.

If you’re considering this option, it’s important to know that some insurance providers may also impose additional restrictions, such as only allowing this arrangement with court-appointed financial guardians.

Common Life Insurance Beneficiary Mistakes to Avoid

Even with careful planning, a few common oversights can affect how your life insurance proceeds are distributed.

When reviewing your policy, be sure to avoid:

Naming a minor child without a plan for managing the proceeds. Consider who will manage the funds as well as when your child should receive them.
Forgetting to update your beneficiaries. Marriage, divorce, birth or adoption of a child, or the death of a beneficiary are all appropriate reasons to review your designations.
Assuming your will controls your life insurance proceeds. Life insurance proceeds generally pass according to the policy's beneficiary designation, rather than the instructions in your will.
Overlooking contingent beneficiaries. Naming a backup beneficiary can help ensure the proceeds go where you intend if your primary beneficiary cannot receive them.
Failing to coordinate with your estate plan. To make the process as smooth as possible, make sure your beneficiary designations work alongside your will, trusts, and other financial arrangements.

Alternatives to Naming a Minor Beneficiary

Naming a spouse or relative as the beneficiary with the understanding that the money is for the minor is also inadvisable. A named beneficiary has no legal obligation to give the funds to anyone else once they are disbursed, and there is no legal recourse for the minor children if the named beneficiary depletes the funds or chooses not to give them any of the funds.

Plan Today to Protect Your Loved Ones Tomorrow

Your beneficiary designation is an important part of your financial and estate plan. Review your beneficiaries periodically and after major life events to make sure they still reflect your wishes.

If you're considering naming a minor child as a beneficiary, take time to understand your options. Whether you choose a trust, custodial arrangement, or another approach, thoughtful planning can help ensure the proceeds are managed and distributed in a way that supports the child's needs.

Armed Forces Mutual Can Help

If you need to change the beneficiary on your Armed Forces Mutual life insurance policy, please contact Policy Services for assistance at 800-336-4538. If you are interested in learning about our military life insurance options, contact us to learn more.

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