What happens to a life insurance payout left to a minor?

Parents generally want their children to be taken care of in the event of an untimely passing. Unfortunately, a minor child cannot legally receive a life insurance benefit payment until they reach the “age of majority,” which is either 18 or 21, depending on the state. To make sure a child receives a death benefit, the policyholder can do the following:

Set up a life insurance trust

This is the simplest way to ensure there are no legal challenges to your child receiving life insurance benefits. A life insurance trust is a legal entity that holds the funds and distributes them as directed by a trustee. The policyholder can choose the trustee when they set up the trust. It’s typically either an attorney or a trusted family member.

The trust is listed as the beneficiary on the life insurance policy. The death benefit will be paid to the trust and administered by the trustee. It’s not being paid to the trustee. That’s an important distinction because the money is earmarked for the minor. The terms of the trust agreement should clearly state this, along with any conditions on how the money should be paid out.

Set distribution terms for the death benefit

Another option to make sure the child is taken care of is to dictate how the death benefit will be distributed upon your passing, like paying off the house or contributing the entire amount to a college fund. Doing this is more restrictive than a life insurance trust where the trustee has some control over how the money is spent.

A common scenario for many parents is setting up a life insurance trust with distribution terms. There are many ways to structure that. Some of them give more control to the trustee. That can be beneficial if the minor child is young. Their life situation could change several times before they reach the age of majority, so more discretion is required for funds distribution.

Name the child as a contingent beneficiary

Naming a minor child as a contingent beneficiary ensures that they will receive what’s left of the death benefit when they reach the age of majority. This is typically done when the deceased’s spouse is still alive after the policyholder passes on. The spouse would be the primary beneficiary, and the child would be the contingent beneficiary.

The downside to using the “contingent beneficiary” tag without a life insurance trust or distribution terms is that it puts all the control in the hands of the primary beneficiary. That means the spouse could spend the entire death benefit before the child comes of age. Preventing that requires setting up some direction on how funds will be distributed.

The Bottom Line

Setting up a life insurance trust, as well as establishing the distribution terms for the death benefit, can help shield the payout from creditors or other third-party claims. Additionally, naming the child as a contingent beneficiary can ensure that the requested payouts occur according to your wishes. Also, having an attorney with experience in estate planning to assist in this process can give you added peace of mind. All these steps will help ensure that minor children receive secure financial support immediately after you pass away and throughout their lives.

Sources:

https://www.progressive.com/answers/life-insurance-beneficiary-minor/

https://havenlife.com/blog/minor-beneficiary-of-life-insurance/