Should My Child Be My Life Insurance Beneficiary?

When men and women buy life insurance, they typically want to make sure the benefit will go to the beneficiary they designate. Is there any reason why a life insurance company wouldn’t follow your instructions?

Is Your Child Your Life Insurance Beneficiary?

Yes, if your minor children are your life insurance beneficiaries. Unfortunately, this mistake is very common. Parents with their hearts in the right place name their child as the beneficiary to their policy. The problem is, insurance companies will not pay benefits to a minor.

Often, prospective life insurance buyers have not been educated on how to properly structure their policies. Generally, once a spouse is named as the primary beneficiary, policyholders designate that additional benefits go to their children. That money is intended to give the children a head start in life, to care for them, to fund college and so on. With these aims, many parents list their children as contingent beneficiaries.

However, if both spouses were to pass away before a child is of legal age, most insurance companies will not write a check to a minor. That is true whether it is a small check for $5,000 or a big check for $5 million. The money must be paid to a responsible adult who has been designated by the insured as a recipient of the insurance benefit.

How to Avoid This Mistake

It’s important to work with a competent estate attorney and assemble your toolkit for estate planning. This should include a traditional will as well as a living will. You may also need to create a trust. Be sure to designate an executor for your estate and a custodian for your children. This executor would be responsible for carrying out your wishes according to your will.

It’s critically important to define which money goes to which party, and when. The designations of owner and beneficiary of your life insurance policy will be coordinated with your estate planning attorney. It could be that a trust is named the beneficiary or the executor of your estate or even the estate itself could be listed. This step becomes even more important if you have special needs dependents. (For related reading, see: Using Life Insurance to Help Provide for Someone With a Special Need.)

By working with an estate lawyer that you trust, you will get advice to structure your beneficiaries to ensure your wishes are carried out without delay. This way, the benefit of your life insurance policy will indeed go to the intended beneficiary.

It should be noted that improper planning can lead to true nightmares. I recall that a number of years ago, a tragic event took place in my own town. A young couple went out for the evening and unfortunately died in a car crash. They had not made provisions for the care and custody of their small children. They did, however, have substantial assets, including life insurance. You can imagine the war that then took place. Grandparents on both sides took legal action to take custody of the children—and possession of the money. The case dragged on in court for a long time and left people on both sides hurt and bitter. This entire horrible scene could have been avoided with the right financial documentation.

Do you know who the primary and contingent beneficiaries are for your life insurance policies? (For more from this author, see: How to Use Life Insurance as an Executive Benefit.)