Since life insurance is often purchased to provide for the needs of children, some people assume they should name their children as the beneficiaries of their policies. However, as well-meaning as this may be, it can actually cause delays in money getting to the children, or worse.
Minors Are Not Legally Able to Manage Their Own Financial Affairs
In most states, including Pennsylvania, insurance money cannot be paid directly to children under the age of 18. A guardian of the property (also called a guardian of the estate) must be appointed to administer the funds. If the parents did not name this guardian in their wills or in the life insurance beneficiary designation, a court will appoint one. The guardian’s responsibility is to wisely manage the funds for the benefit of the child beneficiary. This is a different role from a guardian of the person, who is appointed to raise the children if the parents die or are incapacitated.
Appointing a Guardian of the Property May Delay Release of Insurance Proceeds
If the guardian of the property is not named in the parents’ wills, it may take time for the court to appoint such a guardian, which means delays in the children being able to access the funds. When the funds are accessible, there may be only general guidelines for how the money can be spent. The legal duty of a fiduciary (which is what this guardian is) is to manage the money prudently for the purposes for which it was intended.
Parents’ Plans for Spending the Money May Not Be Followed
If parents have specific wishes for how the money should be spent for the children, such as on a particular private school education or engaging in specific hobbies or sports, there is no guarantee that the money will be spent that way. If the guardian is named by the parents and told by the parents of their wishes, the guardian is likely to follow them to the extent possible. However, when the court appoints the guardian, even the wishes the parents wrote down may not be followed.
Teenagers May Spend Unwisely and Not Save for Future Needs
When the child turns 18, the guardianship ends and all remaining money becomes the child’s, whether it is $5,000 or $500,000. Giving this level of responsibility to a teenager concerns many estate planning and life insurance lawyers. Research on adolescent brain development shows that brain development is not complete until an individual is in his or her twenties, and one of the last parts of the brain to develop is the prefrontal cortex, which helps control impulses. So putting a young person in charge of large sums of money presents a huge risk that the money will not be spent as the parents intended and will likely not last until the youth secures fulltime employment and is able to support himself or herself.
Naming the Contingent Beneficiary Can Be More Challenging Than People Expect
Most married people name their spouses as the beneficiaries of their life insurance policies. Life insurance policies allow a contingent beneficiary to be named. This is the person who receives the insurance proceeds if both parents die at the same time. Instead of automatically naming a child or children as the contingent beneficiary, parents should consult with an experienced life insurance lawyer who understands the ramifications of naming a minor child as a beneficiary.
Anyone with questions about selecting children as life insurance beneficiaries is encouraged to contact Boonswang Law for more information or a free consultation.