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Every parent wants their children to be provided for in the event of their untimely death. That’s why so many make the smart decision to invest in life insurance in case the unexpected happens.
Most parents do a good job of taking care of the insurance side – buying the right kind of policy for their needs, buying a sufficient death benefit to provide financial security for their surviving family, and keeping the premiums affordable. But there’s one aspect of life insurance where some parents don’t do such a good job, and that’s in naming the beneficiary of the policy.
Contrary to popular belief, if you have a minor child it’s not enough to name him or her as the beneficiary of your life insurance policy, as this could prevent the death benefit payout from going to your child. In fact, one of the most important things you can do is select a custodian for the assets, so that someone you know and trust will have full legal authority to manage the financial assets until your child becomes a legal adult. Failure to do so can have catastrophic financial consequences for your child and for the person who becomes their legal guardian.
What is the Custodian of an Insurance Policy?
A custodian is someone who is tasked with protecting and maintaining financial assets that belong to someone else. If the world of life insurance, a custodian guards and maintains the assets received by minor children from a life insurance policy until they reach the age of majority.
For example, if you die while your children are still legally considered minors, the custodian will manage the money received from the death benefit payment for the children until they become legal adults. At that point, the custodian relinquishes all responsibility for protecting the assets and must turn them over to the children. In most states, this occurs at age 18; in others, not until the minor child reaches age 21.
The custodian manages the assets for the benefit of the minor. This can include:
- Making withdrawals from the assets to pay for medical, educational and other expenses
- Buying stocks, bonds, mutual funds and other types of investments on behalf of the minor
- Managing the overall account in the best interests of the minor child
The custodian also helps ensure that insurance proceeds and other inheritance benefits can be transferred according to the parents’ wishes.
A custodian for life insurance is not the same as the guardian, and it’s important to understand the difference between the two roles. The custodian manages the minor child’s financial assets. The guardian functions as a substitute parent, having legal custody of the child and having charge of his or her daily life. The guardian is usually named in the parent’s will; the custodian is usually named in the life insurance policy. If the parents choose, the same person can act as both guardian and custodian.
What is a custodian for beneficiary?
Another common question when buying life insurance for the first time is, “What is a custodian for beneficiary?” In this case, it simply refers to the fact that the custodian is acting on behalf of the person (or persons) named as the beneficiary in the life insurance policy. If you have more than one minor children, the custodian will act on all their behalf. Also, you will need to specify how much of the death benefit payout goes to each child.
Why You Need A Custodian
In some states, minor children are not allowed to legally own financial assets in their name. This creates a problem when parents name their minor children as the beneficiaries of their life insurance policies. In this situation, naming a custodian is essential for ensuring that life insurance payments and other inheritance benefits can be transferred to the children according to your wishes. Under the Uniform Transfers to Minors Act (UTMA), life insurance proceeds can be left to a minor as long as the assets are maintained by a custodian until the minor reaches the age of majority.
Failure to name a custodian can have serious consequences for your surviving children if you die before they reach adulthood. In particular, if a minor child is listed as the beneficiary on your life insurance policy, he or she may not be able to access those assets until reaching the age of majority. This defeats the main purpose of buying life insurance, which is to provide financial security for your children after you’re gone.
Failure to name a custodian could also result in a probate court appointing a guardian for your child and allowing the guardian to become the custodian of assets. This involves a time-consuming and expensive process, and puts the care of your child in the hands of the courts, which no parent wants.
Choosing the Right Custodian
A custodian for your minor children won’t have nearly as much interaction with your children as the person/couple you select as their guardian. However, it’s just as important to select someone you know and trust to act in their best interests at all times.
You may have a specific person in mind, or you may have several possibilities for the custodian. These questions can help in making your decision:
- Does the person have some knowledge and experience with finances?
- Does this person share your values about money management?
- Will she or he feel comfortable making financial decisions on behalf of your child?
- Does this person have the time to serve as custodian?
Most important, does the person want the responsibility of making financial decisions for your child? If not, choose someone else who does. You don’t want someone making critical financial decisions for your child who doesn’t have the time or the interest.
Once the right person has agreed to serve as the custodian, it’s a simple matter to fill out the forms with your life insurance carrier and make your choice legally binding. You may want to consult with an estate planning attorney regarding custodianship of other assets.
Designating a life insurance custodian for your minor children is not a decision that should be made quickly or lightly – but it should be made. Doing so will ensure that the money you’re counting on to support your children if you die prematurely will be used as intended and will be protected and well managed by someone you know and trust.