To begin with, buying a life insurance policy comes with naming a beneficiary. Without an heir, what’s the point of the policy? When quoting a beneficiary, most policyholders think of their children, which may seem like a good thing since insurance is about protecting their future. However, is it advisable to always do that?
This post contains the pros and cons of naming a minor as an insurance beneficiary and possible alternatives. Read on to find out more!
How Does a Life Insurance Plan Typically Function?
Life insurance is a legal agreement between a policyholder and an insurer who agrees to pay a benefit to any named beneficiary at the policyholder’s death. The agreement stands as long as the premium is being paid monthly.
The death benefit may be used to cater for
- Final expenses
- Family upkeep
- Debt repayment
- Charity and donations
At the death of the policyholder, the beneficiary must file for a claim to get access to the benefit. Sometimes, they get notified by the insurer about their beneficiary status.
To file for a claim, there are essential documents the beneficiary must have. With these documents comes the problem of naming a child as an insurance beneficiary. Without these documents, they cannot file a claim or make a bank deposit. This is a significant disadvantage. Additionally, kids cannot own assets which further complicates the situation.
Is There any Alternative to Naming a Minor?
If the named beneficiary is under 18 and cannot have direct access to the benefit, they can have it indirectly through a guardian. The state usually appoints a guardian to decide the death benefit and its spending or investment. The chosen guardian is usually anyone with close ties to the family, a family member, or a family friend. Such individuals maintain the guardian status until the child comes of age, i.e., 18 or above.
A parent can also be named a beneficiary to care for the said child. If your spouse or ex-spouse is alive, you can call them a beneficiary or co-beneficiary.
Sometimes, having a guardian for your child or naming a parent as the beneficiary is not always advisable. In theory, they may take care of the child seeing as there is a form of bond there, but in the eyes of the law, the money is theirs to do as they deem fit.
To avoid this, you should name a testamentary trust as the beneficiary. It is a kind of trust in the last will. It caters to the distribution of the proceeds and estate of the settlor. It clearly expresses how the benefits will be used, how the child will receive them, and when they will receive them.
A trustee is appointed to manage the benefit until the beneficiary takes over, usually when they graduate from college or get married or turn 25.
One advantage over a named guardian or a parent as a beneficiary is that the probate court checks upon the trust to make sure that it is appropriately handled.
You cannot purchase a life insurance policy to secure your child’s financial future, only for it to become the opposite. We have established that naming a child as a beneficiary is not ideal, nor is naming a guardian. It would help if you had a trust for the beneficiary.
Our team of insurance experts at Weavers & Associates can help you with all your queries regarding life insurance and can also help you ensure that your beneficiaries remain financially secure even after you’ve passed away.