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If you’ve recently become a parent, your child’s safety and well-being is paramount. It’s no wonder that the birth of a child is usually a motivator for getting life insurance coverage. Most people get life insurance to cover mortgage, education, and other expenses so their families can continue after they die.
Most couples designate their partner or spouse as the beneficiary of their life insurance, but some parents may prefer to designate their minor children as the beneficiary of the life insurance. However, naming a minor as the beneficiary of life insurance can lead to significant complications. Instead, consider appointing an adult guardian or establishing a trust as the beneficiary of your life insurance.
Should you name a minor child as beneficiary of life insurance?
Once you have chosen a life insurance policy, you will need to name a beneficiary for the policy.
“A beneficiary is the person or entity that you name in a life insurance policy to receive the death benefit,” according to the Insurance Information Institute (III). The Institute noted that “you can name: one person, two or more people, the trustee of a trust you have created, a charity or your estate.”
There are several potential problems
As noted by AAA life insurance, “Minor children cannot directly receive the proceeds of a life insurance policy. Instead, the state would appoint a legal guardian if you had not done so, which is a lengthy process. expensive. This tutor would then determine how the money is managed and spent – and that may not be what you want. “
“If you have a child or adult with special needs to care for, funds inherited from you or anyone else can put government support at risk. This can disrupt the care and support programs on which they depend for their daily and future care, ”according to New York life.
If you are a single parent, also consider whether you want the non-custodial parent to be made a court-appointed guardian of your child’s life insurance funds. What if you are divorced? Do you want a step-parent to be appointed guardian of your child? I have seen parents come out of the woods and volunteer to be guardians when the money is at stake.
Three alternatives to designating a child as beneficiary
You have three options instead of naming your child as the beneficiary of life insurance:
(1) an adult guardian;
(2) a Uniform Transfers to Minors Act (UTMA) account; Where
(3) a trust established for your minor.
There are pros and cons with each option.
You can appoint an adult guardian, but be careful
Your tutor is good with your children, but they are not good with money management. This is a common problem. The purpose of choosing a guardian is to preserve your child’s inheritance until he or she becomes an adult. The benefit of appointing an adult guardian as the beneficiary of life insurance for your minor child is that you avoid the legal process that would occur if you named your child as the beneficiary.
The downsides of appointing an adult guardian are not knowing whether the guardian will honor your wishes and be financially responsible. If your guardian is not financially responsible, the funds may be misused.
Money does fun things for people – it’s like the ring in “The Lord of the Rings” – activating a person’s worst impulses. For this reason, it is not recommended to name an adult guardian as the beneficiary of life insurance for your minor child.
Create a UTMA account
As New York Life explains, “The Uniform Child Transfer Act (UTMA) is the easiest way for parents to ensure their children receive the proceeds of a life insurance policy ( or other assets, such as mutual funds, stocks, bonds, etc.).
Under UTMA, an adult opens an account for a minor in a life insurance company, bank or other financial institution. A custodian, appointed by the parents, controls and manages the assets of a minor until the minor reaches the age of majority in that state (usually between 18 and 21). At that point, the assets are handed over to the adult child, who can use the assets in any way they choose. “
The advantages of a UTMA are its simplicity and the fact that it allows the inclusion of other assets, such as stocks and bonds. The downside of a UTMA is that the minor can receive the funds as soon as they come of age – usually 18 – and financial responsibility and 18 are not always synonymous.
According to New York Life, “A trust is a more detailed arrangement than a UTMA designation and offers greater control over how assets can be used. For example, a trust may be established to receive and manage life insurance proceeds on behalf of minor children or adult family members with special needs. In this situation, the trust is named the beneficiary of the life insurance proceeds.
The downside to a trust is that it is more expensive to set up because you will need to hire an estate attorney. While setting up a trust is more expensive, it gives you more control over how funds are spent and when your child has access to them. Since you can select a bank or fund manager as a trustee, additional safeguards are in place to guard against misuse of funds.
Most people who set up a life insurance trust for their children do not have full control over their children until the child is 25 years old. A trust can ask the trustee to pay for your child’s education and living expenses. You can ask the trustee to pay a monthly allowance to the tutor. You can ask the trust to administer a monthly allowance to your child when he becomes an adult instead of giving him full access to the trust funds. The beauty is that you are in control of how the assets are administered.
Remember the movie “Rain Man?” In the film, the character of Tom Cruise is upset that his father disinherited him in his will. In revenge, he decides to kidnap his adult brother with special needs to control the funds. He did not know that his father had established a trust fund and that a trustee managed all the funds. This is the benefit of trust. In the event that a parent decides to befriend your child for adverse reasons, the funds are protected by the trustee.
The intention to designate your minor child as the beneficiary of your life insurance is well placed, but this poses legal issues that can be avoided by using a UTMA account or setting up a trust for your child and make the trust the beneficiary of your life insurance policy.