What Happens If a Minor Is a Life Insurance Beneficiary?

Life insurance protects your family from your debts after you die. A life insurance policy does this by paying a death benefit to your family. When you take out a life insurance policy, one of the things you must do is name a beneficiary. If you name your minor child as the beneficiary, however, you must understand how this will affect your family.

Function

Beneficiaries on a life insurance policy allow you to transfer the proceeds of the policy directly to the beneficiary. There are no probate costs associated with life insurance. Naming your minor child as the beneficiary involves naming them as the primary beneficiary on the policy.

Significance

The significance of transferring the death benefit to your minor child is that you are directing the insurer to give money to an individual who is not considered to be legally responsible for himself. A child may not be able to manage large sums of money on his own.

Warning

If you leave a death benefit of any amount to a minor child, you will need to appoint a financial guardian. Even though life insurance is not subject to probate, a financial guardian must manage the assets received by your minor child until your child reaches the age of majority (18 in most states). If you do not appoint a financial guardian in your will, then a court will appoint one for you after your death. This may have negative consequences for your family. For example, if you leave a death benefit to your child, but your spouse is still living, your spouse will not be able to use the proceeds of the insurance policy for any reason because they are being held for the benefit of your child. Your family won't be able to access this money, even if they desperately need it.

Prevention/Solution

In order to make sure that you do not cause a financial hardship for your family, name your spouse the primary beneficiary. This will allow your spouse to use the proceeds of the policy as needed. If your spouse wants to give some of the money to your children, then he may do so at his discretion.

Considerations

If you want to leave a portion of the death benefit to your child, you can always divide up the death benefit, giving some of it to your child and some of it to your spouse. Or, leave your spouse as the primary beneficiary and your minor child as a contingent beneficiary in the event that anything happens to your spouse. Finally, consider leaving a portion of the death benefit to a trust set up in the name of your child or to a custodial account at your bank under the Uniform Transfers to Minors Act, while giving the majority of the death benefit to your spouse.