Can a Child Be a Life Insurance Beneficiary?

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A life insurance beneficiary is the person who receives the death benefit. This death benefit claim cannot ordinarily be contested unless the policyholder was not of sound mind and body when naming the beneficiary. However, there are certain risks in naming a child as the beneficiary, and rules you will have to follow to ensure your child gets the money.

Significance

  • When naming a beneficiary, you may not want to name a child a beneficiary if that child is under age 18. This is because children under 18 cannot enter into legal contracts and are limited from receiving funds and being responsible for the amount of money you would leave them under the life insurance contract.

Problem

  • If you name a child a beneficiary, a court will appoint a financial guardian to watch over the money until your child reaches the age of majority in your state. Most times, this will be age 18. The financial guardian must manage the money prudently, but there are no strict guidelines as to how this should be done. Your child may end up with far less money if poor investment decisions are made in the attempt to manage the money for your child.

Solution

  • You should name a financial guardian for your child. This must be someone that you trust to manage the death benefit proceeds for your child. If you name a financial guardian, the court will not appoint a state guardian. This means that your child's guardian will not be some stranger that you do not know. Hopefully, the person you choose will have more interest in your child's welfare than a court appointed financial guardian.

Consideration

  • Consider setting up a trust fund for your child. You may leave money to the trust and have it professionally managed in addition to appointing a financial guardian. This way, you can specify how the funds are to be invested and when the child may receive the money. You don't need to leave all of these decisions up to the financial guardian after you're gone.

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References

  • "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
  • "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
  • "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
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