WHY LIFE INSURANCE PROCEEDS CANNOT BE PAID OUT TO A MINOR BENEFICIARY

It’s important to know that life insurance proceeds are typically paid to adult beneficiaries or held in trust for minor beneficiaries. This is because life insurance policies are legal contracts and to enter into a legal contract, both parties must have the capacity to do so. Since a minor, by definition is considered unable to fully understand the legal obligations and consequences of contracts, a minor cannot enter into a life insurance contract, and also cannot be the direct beneficiary of a life insurance policy.

Even though life insurance cannot be paid directly to a minor, it is possible for a minor to be named as a beneficiary. However, there are important considerations regarding the financial responsibility and guardianship of those funds. To ensure the minor's best interests are protected, the following options can be used:

a. Naming an Adult Custodian: In some cases, a policyholder may name an adult custodian to oversee the life insurance proceeds until the minor reaches the required age (age of majority) The custodian manages and invests the funds on the minor's behalf, using them for the minor's benefit. Upon reaching the age of majority, the minor gains control of the funds.

b. Creating a Trust: Establishing a trust is another option to manage life insurance proceeds for the benefit of a minor. The policyholder can create a trust and designate it as the beneficiary of the life insurance policy. A trustee, often a responsible adult, manages the trust and administers the funds according to the trust's terms and the minor's best interests. The trust can provide for the minor's needs, such as education, healthcare, or living expenses.

c. Setting Up a Guardian: If no specific arrangements are made, the court may appoint a legal guardian to manage the life insurance proceeds for the minor's benefit. This option is typically used when no other arrangements are in place.

Age of Majority Varies by Jurisdiction:

The age at which a minor becomes a legal adult, known as the age of majority, varies by jurisdiction. In many places, it is 18 years old, but it can be different depending on local laws. When a minor reaches the age of majority, they gain control of any assets or funds held on their behalf, including life insurance proceeds.

Protection of the Minor's Interests:

The restrictions on paying life insurance proceeds directly to a minor are in place to protect their financial interests. Minors may lack the knowledge and experience to manage substantial sums of money, and the law aims to prevent mismanagement or misuse of those funds.

Ensuring the Minor's Well-Being

While life insurance proceeds cannot be paid directly to a minor due to legal capacity limitations, there are effective mechanisms in place to ensure that the minor's well-being is protected and their financial needs are met. By designating responsible adults, custodians, trustees, or creating trusts, policyholders can still provide for the financial security of their loved ones, even if they are minors.

These arrangements ensure that life insurance fulfills its primary purpose: providing financial support and security to those who depend on it when it matters the most.

Life Insurance for children