Should I Name my Minor Children as Beneficiaries of my Insurance Policy?

If you’re like most parents, your beneficiary designation on your life insurance probably lists your minor children as the secondary beneficiaries of your life insurance policy, behind your spouse in the following way:

Primary Beneficiary: Spouse

Secondary Beneficiary: My Children

This is a mistake.

What Happens When a Beneficiary is a Minor?

Children under the age of 18 lack the legal capacity to own more than a nominal amount of assets. So, for example, if you and your spouse have named your minor children as the secondary beneficiaries of your insurance policy and you both die together, the insurance company will not pay out the proceeds of the policy to your minor children.

Instead, a court will likely appoint a guardian to accept the money on the children’s behalf. Guardianship is expensive and time-consuming. It requires a guardian to account to the court and seek approval for virtually every action it takes on behalf of the children’s estate. Additionally, regardless of the amount you have left your children, their share of the estate will be paid out when they are 18 years old and still financially irresponsible.

Alternatives to Naming Your Minor Children as Beneficiaries

If you want your minor children to have access to the proceeds of your life insurance policies you have a couple of options.

If the life insurance policy is for a nominal amount, one option is to list someone you trust as custodian for your children under your state’s Uniform Transfers to Minors Act. The Uniform Transfers to Minors Act allows a parent to name an adult who can manage the property for the minor child until they reach the age of majority. In Texas and North Carolina, funds can be held in a custodial account until age 21.

Ideally, you should set up a testamentary trust in your Will. This will allow you to name the trustee of the trust as the secondary beneficiary. A trust will allow you to appoint someone you choose as a Trustee to watch over the funds, invest the funds, and make distributions from it to your children for their needs according to your instructions.

An attorney can help you coordinate non-probate assets such as life insurance policies and retirement plans, with your Will so that the property funnels into the trust you’ve created for your children.