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Q&A: Minor Children as Life Insurance Beneficiaries

By Dr. Clare Kaufman on September 30th, 2010

Question: I'm purchasing life insurance to ensure that my young children are financially secure. Because the insurance policy is for their benefit, should I name my children as beneficiaries?

Answer:

Children under the age of 18 should not be designated as life insurance beneficiaries. While it seems to make sense to designate young children as the recipients of insurance proceeds, doing so could delay their access to the funds in their name. Minors cannot directly receive or control proceeds from a life insurance policy until they reach the age of majority--age 16, 18, or even 21, depending on state law. In the meantime, guardianship or custody issues can complicate access to the funds for the care of children.

To ensure that your life insurance settlement benefits your children immediately, designate a legal guardian and a trustee to manage the proceeds on their behalf. A trust clearly articulates the terms under which insurance proceeds and assets can be used and distributed. The trustee can manage your children's insurance proceeds and any other inherited assets until they reach the age of majority.

Attorneys and life insurance policy advisors warn against the following scenarios involving minor beneficiaries:

  • A parent may name a spouse as the first beneficiary and children as second beneficiaries. But if both parents die simultaneously in an accident, insurance proceeds would not go directly to children. The children's legal guardian may have limited or no access to the funds.
  • Another common scenario names a minor child as the primary beneficiary, excluding the spouse. With the insurance settlement tied up until the child's 18th or 21st birthday, the surviving spouse could have no access to the funds to support the child during his or her dependent years.

Designating minors as beneficiaries inevitably confuses the insurance settlement process. In both these scenarios, money specifically set aside to support children at their most vulnerable age became inaccessible until they reach the age of majority. To avoid confusion and legal wrangling, it's important to clarify your intentions from the outset. Establish a trust for life insurance policy proceeds and any assets, and name a guardian to serve as trustee.

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