What Happens When the Beneficiary of a Life Insurance Policy is a Juvenile?
March 30, 2024
As parents, our deepest desire is to ensure our children's well-being, even in our absence. This desire encompasses not just their emotional security but also their financial stability. Life insurance ensures a child (or children) will be taken care of financially after we’ve moved on, which is why parents often name their children as beneficiaries of their policies.
However, the process might involve some additional steps compared to when the beneficiary is an adult. Here's what typically happens in the event the beneficiary is a child under 18 years old.
Guardianship or Trust
If the insured person passes away and the beneficiary is a minor, the life insurance proceeds are typically not paid directly to the minor. Instead, they are usually held in a trust or placed under the guardianship of an adult until the child reaches the age of majority (18 or 21, depending on the jurisdiction).
Sometimes referred to as a life insurance custodian, this person or entity handles the distribution and safekeeping of financial assets designated to a minor child by a life insurance policy. The term "custodian" can also refer to a power of attorney. This designation gives a person the authority to make decisions on behalf of someone with diminished capacity.
Responsibilities for Minor Beneficiary
An insurance guardian or trustee has several important duties:
- Distribute assets
- Make withdrawals for the minor's benefit
- Manage the overall account
- Purchase investment securities on behalf of the minor
- Transfer assets once the child reaches the age of majority
A trustee does not have legal custody over the minor. A person in this position only handles financial assets.
Court Approval
In some cases, especially if the amount is significant, the court may need to approve the guardianship or trust arrangement to ensure the child's interests are protected. The appointed trustee or guardian will manage the life insurance proceeds on behalf of the minor. They are responsible for using the funds for the minor's benefit, such as for education, living expenses, medical needs, etc.
Trustees or guardians are often required to provide regular accountings to the court to ensure transparency and proper management of the funds.
Custodial Accounts
Alternatively, the proceeds might be placed into a custodial account established under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA), depending on the state. These accounts are managed by a custodian until the minor reaches the age of majority.
What Is a Power of Attorney (POA)?
A policyholder can name a power of attorney (POA) to act on behalf of a child beneficiary of a life insurance policy.
Here's how it typically works:
Designation: The policyholder (also known as the insured) can designate someone as the power of attorney in their will or through a separate power of attorney document. This designated person will have the authority to manage the life insurance proceeds on behalf of the child beneficiary.
Responsibilities: The power of attorney appointed by the policyholder would be responsible for managing the life insurance proceeds in the best interests of the child beneficiary. This may include investing the funds, using them for the child's education or other needs, and ensuring that they are properly distributed when the child reaches the age of majority.
Legal considerations: It's important for the policyholder to carefully consider who they appoint as the power of attorney and to ensure that the document clearly outlines the scope of authority granted. Additionally, legal advice may be sought to ensure compliance with relevant laws and regulations governing powers of attorney and the management of assets for minor beneficiaries.
Backup plans: It's also advisable for the policyholder to have contingency plans in place in case the designated power of attorney is unable or unwilling to act when the time comes. This may involve naming alternate individuals or trustees to fulfill the role if needed.
Emotional Security Through Professional Care
Life insurance policies safeguard loved ones when we are no longer present. A life insurance custodian ensures your policy is a lifeline for those who depend on you. They protect minor beneficiaries and individuals facing challenges with lack of capacity.
Selecting the right guardian or POA is more than a financial decision; the person (or company) safeguards the future well-being of your loved ones. Contact 1891 to find out how to ensure that your beneficiary can be protected.
About 1891 Financial Life
At 1891 Financial Life, we don’t just sell policies, we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. In 2023, 1891 Financial Life was listed by Forbes as one of "The World's Best Life Insurance Companies."
Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs no matter what stage of life you’re in.