Naming Minor Children as Beneficiaries of Life Insurance
One way to provide a significant asset for your family is by purchasing life insurance. Many employers provide some life insurance as a benefit of employment. Additionally, you have the option of purchasing life insurance separately to augment the total payout after your death. Term life insurance can be relatively cheap. Depending on your age, it is possible to get a very large policy for very little money.
Naming a Beneficiary
Life insurance is essentially a contract between the policy owner (you) and the life insurance company where the insurance company agrees to pay a certain amount of money upon the death of the insured to a beneficiary that you choose. There is usually a primary beneficiary and a secondary beneficiary (in case the primary is unavailable). The beneficiary can be just about anyone. Most people simply name their spouse as the primary beneficiary and their children as secondary beneficiaries. A word of caution when naming beneficiaries: under most state laws insurance companies cannot release insurance proceeds directly to beneficiaries who are minor children (typically children under the age of 18). So, in the event that you (1) name your spouse as primary beneficiary and your children as secondary beneficiaries, and (2) you and your spouse die simultaneously (car wreck, plane crash), the insurance proceeds will be tied up until a court can determine a property guardian for the children. It also means some of the proceeds will inevitably be spent trying to get the funds released to the children.
How to Leave Insurance Proceeds to Children
There must be a way in which a parent can leave their insurance proceeds to their minor children if that is their objective. Indeed, there are a few ways to handle this issue:
- The Uniform Transfers to Minors Act or UTMA is a state law that allows you to name a custodian for minor children. Designated custodians manage the property until the children reach the age of termination. The custodian can be a family member or trusted friend. Contact your insurance provider and they will usually have forms for this. Essentially you will name your children as primary or secondary beneficiaries and also name a custodian in the event that the children are still minors when you die.
- A living trust can be named as the beneficiary of the life insurance proceeds. The living trust must name the children as beneficiaries of any and all insurance proceeds received by the trust. Within the living trust you will set up a child’s trust as a road map of how the funds will be handled. Contact your insurance provider and they can tell you their policy regarding living trusts. Additionally, it is important to consult with an attorney before attempting to set up a trust.
- An adult who you trust will use the proceeds to care for your children. This person may be the guardian-to-be who is named in your will or elsewhere.
