Many parents take out life insurance to provide for the support of their minor children should they unexpectedly pass away. In fact, it’s one of the main reasons that people take out life insurance in the first place.
Therefore, it’s very common for children under the age of 18 to be named as beneficiaries of life insurance policies, or the people who will benefit from the payouts. Single parents might name their children as primary beneficiaries of their insurance policies, or the first people to whom the payout goes. Coupled parents typically name each other as primary beneficiaries and then their children as contingent beneficiaries so they’d receive the payout should both parents die.
However, insurance companies will not directly hand the payout to beneficiaries under the age of 18. Instead, a guardian will be appointed to manage the money and support the children with it until they turn 18.
Parents often name guardians for their children in their will. You can also leave a signed statement naming guardians for your minor children, which will be honoured, but including those arrangements in a will make it easier to carry out your wishes.
You can have more control over how the life insurance money is managed and spent and when your children receive it if you write your life insurance policy in trust. In these circumstances, a named trustee - usually a family member, friend, or legal professional - will manage the trust.
This trustee will typically draw money out of the trust to support the minors or cover expenses like their education. Trusts can be written in different ways, some giving the trustee more discretion over how the fund should be administrated and others specifying more exactly where the money should go. Usually, there will be a set date or occasion at which time your children will get access to the money in the trust, such as when they turn 18 or graduate from university.
Another benefit of writing a life insurance policy in trust is that the payout will typically not be considered part of your estate and therefore won’t be subject to inheritance tax.