Children As Life Insurance Beneficiaries

When completing a life insurance application people often list out all the people they love most in the world, sometimes without thought to the meaning of primary or contingent beneficiaries. When minors are involved, the primary beneficiary is most often the person who will be caring for the children and taking care of them financially. In a family situation the wife should be the beneficiary of the husband’s policy and the husband the beneficiary of the wife’s. The children should be listed as contingent beneficiaries.

What should you do if you are divorced, or your spouse has died? You want to take care of your children in the event of your death, but children cannot cash checks, and you certainly wouldn’t want them to handle large sums of money. How do you specify the beneficiary so they will be taken care of? Fortunately, a statute has been adopted in all states to take care of this situation. It is called the Uniform Transfers to Minors Act or UTMA.

Think of UTMA as a mini-trust with standardized language that does not need an attorney to set up. An UTMA account can be set up at a bank or brokerage company. Under UTMA an account can be set up for a minor using the minor’s social security number. The UTMA account will require a custodian be named to manage the account.

When specifying a life insurance beneficiary to benefit a child you should write “(Name of Custodian), as Custodian for (Name of Minor) under the (Name of State) UTMA. It is important to understand the difference between a custodian and a guardian. The custodian of a child manages the child’s money and potentially other assets such as real estate, stocks, bonds, art and other collectibles, automobiles, patents, royalties, and other assets of value. The guardian is responsible for the child’s health, support, and maintenance, just like a parent.

You can see how a person could specify one person to handle their children’s finances should something happen to them, possibly through a beneficiary designation on a life policy, and another person to care for and nurture the child until they are an adult. It is important to have a will to specify who the preferred guardian is, otherwise a court will appoint someone. The court’s choice may not be who you would have chosen! The same goes for the custodian. Though a life insurance beneficiary is a matter of contract and is clear on who the check will be written to, a custodian should be specified in the will to take care of other assets.

Money in a custodial account irrevocably belongs to the minor, but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 or 21, depending on the state. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. UTMA accounts are required to remain open until the child reaches the age of majority in their state. An UTMA account will stay open, even with a zero balance, until the minor reaches the age of majority and has the irrevocable right to receive the funds. If the account has been spent down the UTMA beneficiary could sue the custodian if the funds were not used for the minor’s support.

If a beneficiary designation for a minor is not properly specified, costs will be incurred. A court is appointed to manage the child’s funds until a custodian is determined. I have heard of several cases where a child’s guardian had to go to a court with a list of expenses and ask to make a withdrawal from the child’s insurance proceeds. The court also charges a fee for every appearance. Not only is it inconvenient, it can be expensive.

Choosing your beneficiary is the most important choice you make when setting up your life insurance. Getting it right is the job of your licensed representative. Take advantage of their knowledge and training and get it right for your sake, and your beneficiaries.

For my information or to get a quote give us a call at 800-301-8113 or visit goldcoastlifeinsurance.com