When we buy life insurance when our children are young we can’t image not being present for all of our children’s life events; first day of school, graduation, college, marriage and grandchildren, because that is just how life is.
But what if you die while your kids are still minors, because it does happen! They may not receive the proceeds from your life insurance policy immediately. Not because of the insurance company, but because of your states jurisdictions. Here are some of the reasons why:
- In most jurisdictions, in the interest of protecting the assets of a minor, state law requires that a guardian be appointed to administer the proceeds payable to the minor child.
- If a guardian is not already in place, your next of kin will have to undergo the time and expense of appointing a guardian to receive and administer the proceeds.
- Once a court appoints a legal guardian of the minor’s estate that guardian will control the money for the minor’s benefit until he or she reaches the age of majority, depending on state law.
- Additionally, if you have a special needs child or adult you care for, inherited funds from you or anyone else may put their government support in jeopardy. This may disrupt the care and support programs they depend upon for their daily and future care.
What does this all mean to you? Be careful about naming your kids as beneficiaries while they are minors. It could be years before they receive the money you intended for their care. This could potentially delay their education, their housing situation, and their quality of life.
So what do you do to ensure that your minor child would receive the benefits of your life insurance policy? Here are a couple of good solutions:
- Utilize The Uniform Transfers to Minors Act
This is an easy way for parties to ensure their children receive proceeds from a life insurance policy (or other assets, such as stocks, bonds and mutual funds). Under the Uniform Transfers to Minors Act (UTMA). An adult sets up an account for a minor at a life insurance company, bank or other financial institution. A custodian, named by the parents, controls and manages the assets for a minor until the minor reaches the age of majority as defined under the UTMA statute for that particular state (usually between 18 and 21) At that time, the assets are turned over to the adult child, who can use the assets in any way he or she chooses.
- Another solution: Establish a trust
A trust is a more detailed arrangement than a UTMA designation, and provides increased control over how assets can be used. For example, a trust can be established to receive and manage the life insurance proceeds on behalf of minor children or adult family members with special needs. In this situation, the trust is designated to the beneficiary of the life insurance proceeds.
Here’s the advantage: You (the insured) establish the trust, select the trustee, and establish the terms under which assets can be used and distributed from the trust.
In this way, the life insurance proceeds can be used precisely how you intend to take care of the people you love. This often works in the best interests of minor children and other dependents.
And of course, it works in your best interest because it gives you extra peace of mind.
Make sure your life insurance policy does what you intended it to do. Keep your children financially safe and help them lead the life you want for them. Don’t name your minor children as beneficiaries. Set up the proper account for you.