Ever wonder what happens if a minor is a beneficiary on a life insurance policy? Would the money go to their guardians or directly to the minor’s bank account? This can be a crucial question to ask when you are about to buy a life insurance policy.
While some policies might allow you to name any person under the age of 18 as a beneficiary on life insurance, others do not. To avoid ending up in a complicated situation, take time to understand how the process works, depending on where you live and your insurance provider.
In this blog, we’ll try to explain what the experts recommend when it comes to adding young beneficiaries to your life insurance policy
Naming a Minor as the Primary Beneficiary on a Life Insurance Policy
To ascertain that your child is well taken care of, you may want to consider naming them as the primary beneficiary on your life insurance policies. However, there are some things you should know before taking action.
It’s imperative to recognize that when a minor inherits the benefits of a life insurance policy, they do not automatically receive access to its cash value until they reach 18 years old. That’s the law in Michigan.
Other policies require them to be at least 21 years old before receiving any money from an insurance fund. This means that for your child to be able to use their inheritance from your life insurance policy, they require someone over 18 or 21 to act as a custodian until they attain the right age.
The process of choosing a custodian can be expensive and time-consuming. The court overseeing the distribution of funds may charge high fees during the period, which could be passed along to your beneficiaries. It could end up affecting the payout plan you had for your children in your life insurance policy.
Alternatives to Naming a Minor as a Beneficiary
So, what can you do to ensure that a minor gets the most out of an insurance policy? Here are two alternatives to try:
Create a Trust
Trusts are particularly beneficial if you have minors who will become beneficiaries of your life insurance policy upon death. There are plenty of reasons why you may want to create a trust. It allows you more control over how your assets are distributed in accordance with your will or living trust.
If you plan to create a trust and name someone other than your child as a beneficiary, ensure that person is aware of any potential restrictions. Failure to fulfill them could eventually nullify your insurance policy or lead to legal troubles.
Choose a Custodian
The custodian of your child is someone you pick to control their assets. Most life insurance policy companies require you to name one if you list a minor as your primary beneficiary. When selecting a custodian, you want to verify that they have the minor’s best interests at heart.
List someone a minor will trust and respect, and explain why they’re in charge. For younger children, that might be someone who is already close to them. For teenagers, you may choose a person they would like to hang out with. Just make sure it’s someone they can listen to and learn from as time goes by.
Update Your Life Insurance Policy Today
Now that you know what happens if a minor is a beneficiary on a life insurance policy, it’s time to check and update your current policy.
At Autumn Insurance, we can help you evaluate and update your plan. We’ll help to ensure it reflects all your current and future financial needs, including flood coverage. Contact us today to review your life insurance policy.