Why A Minor Shouldn’t Be Your Life Insurance Beneficiary

Today I’m going to tell you about the embarrassing and terrifying tale of my very first life policy. I made a major rookie mistake back then; if anything had happened to me, I would have left my daughter a real can of worms.

I had just received a new job complete with a salary and great benefits that allowed me to purchase a life insurance policy using a discount available to me through my new workplace. I felt great! I knew I was making the necessary preparations, bolstering my family against the worst case scenario. I proudly named my one year old baby as the beneficiary of the policy–big mistake.

Why You Shouldn’t Name a Minor as the Beneficiary of Your Life Insurance Policy

I was totally oblivious to the pitfalls of naming your minor child the beneficiary of a life insurance policy. If you want to ensure that your young child benefits from your policy, your work doesn’t end with filling her name into the policy’s blanks. You should also appoint a trusted adult to be the money’s guardian, or you could create a trust as beneficiary. Ignoring these options could lead to troubles you should have anticipated.

If you have a spouse who would be the child’s guardian in the event of your death, that person will have to petition the court to act as guardian to the money unless you appoint them now. This is especially true if you’re separated or in the process of getting a divorce. Always be specific and appoint someone else as guardian to the proceeds.

Incidentally, if neither parent is alive, the court will appoint a guardian for the money. Court-appointed guardians are not ideal. Entanglement with the court is expensive, intrusive and time-consuming. It’s also entirely possible that the guardian will make poor financial decisions, such as risky investments with the money. Remember, this person won’t have the same deep, personal stake in your child’s future you do.

And don’t forget, all of that money is going to fall into your child’s hands on their 18th birthday. I don’t know about you, but I think the odds of an eighteen-year-old wisely managing half a million dollars seem slim.

Best Practices for Making Sure Your Life Insurance Benefits Your Small Child

  • If your intended beneficiary is a minor, it is a good idea to arrange for the money to go into a trust until that child is about 25 years old. While it is still in the trust, it can only be used for the specific purposes you designated when you set it up. No one else can use the money at all.
  • If you have a spouse and they would make a good trustee, specifically designate them the trustee in advance. Remember, your marriage alone will not necessarily make them the trustee! You want to avoid having them petition the court for an appointment.
  • Do what you can to avoid appointing more than one trustee. This almost always leads to problems. A better way to ensure the trust is being run according to your wishes is to be very specific when you create it.
  • Along those lines, make sure you are specific when you set the terms of the trust. You need to be clear about what a trustee can and cannot do with that insurance money. If you don’t, even if the trustee is your choice, they may not be able to manage it the way you’d have liked.

You don’t have to be an insurance expert to handle your affairs like a pro

If you already have a life policy with your child as the beneficiary, don’t worry. It’s not too late. In most cases, you simply need to call the carrier and request a ‘Change of Beneficiary’ form. Hammer down the details with the trust and trustee. Complete and submit it, and you’re done.

You care enough to plan ahead for the well-being of your child, so make sure you’re really taking care of them in the best way. There’s no need to panic. You don’t have to be an insurance expert to handle your affairs like a pro. All you really need to know is where to look for help, and since you’re here reading this, you’re on your way. I told you my embarrassing story in the hopes that you will never have to tell it yourself!

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