Life insurance coverage can be a wise choice for parents. In the event of your passing, there would already be arrangements for your children's care and their education. However, children cannot access or handle the proceeds until they are of legal age. Therefore, choosing a beneficiary can be difficult if you want the insurance to support your child.
Thankfully, there are some measures parents can take to ensure that the money from their life insurance policy is used to adequately provide for their children.
When purchasing a life insurance policy, parents may designate a child as their main beneficiary. However, when you pass away, the child won't receive the insurance proceeds. The money will be managed by a court-appointed adult custodian until the child reaches adulthood. The money will then be unconditionally transferred to the child on their 18th or 21st birthday.
There are certain benefits to designating a minor child as a life insurance beneficiary. For instance:
- The money will eventually be available for your children to utilize as they see fit. When the money is eventually given to your child, they can use it to cover expenses like education, healthcare, or other essentials of life.
- The money will be more useful to your child than any other possible since they are probably not financially independent yet.
- When your children reach young adulthood, the proceeds from your life insurance can help prevent financial hardships.
If you want to designate your child as the primary beneficiary do not forget to add a conditional beneficiary in case the primary beneficiary passes away or is otherwise unable to receive the proceeds of the life insurance policy.
There are significant drawbacks to designating your child as the policy beneficiary, even while it makes sense to want your offspring to receive your life insurance proceeds. This list of drawbacks includes some of them:
- Depending on state legislation, your children won't be allowed to access the money to utilize for their financial requirements until they are 18 or 21.
- There may be significant costs associated with the process of moving the funds from the court-appointed legal guardian to your children, including legal bills and court charges. These costs decrease the funds left to get passed to the children.
- You are no longer in charge of the money's management. If you have designated a minor as a beneficiary, the court will appoint a guardian for the proceeds on your behalf.
Fortunately, there are steps you can take to have more control over the life insurance benefits so the money is spent properly for your children and none of these negative effects arise.
Making a living trust and designating it as the beneficiary is one of the options. The trust will get the proceeds of the death benefit. To oversee the assets, you can appoint a trustee. You can also specify how to spend the money and when it should be transferred to your child.
Another option is setting up an account under the UTMA (Uniform Transfers to Minors Act) with your insurance provider. With the help of this law, you can choose a guardian who will be in charge of looking after your child's finances until they reach adulthood. The money can be used to cover your child's expenses, and when your child reaches adulthood, the remaining money will be transferred to them.