Demystifying Insurance After Death of Policy Holder

Episode No. 6:

Minor Children as Life Insurance Beneficiaries: Risks and Alternatives

Naming your minor children as beneficiaries of a life insurance policy may seem like a good way to secure their future, but it comes with challenges. Let us understand the risks of naming minors as beneficiaries and suggest alternatives in simple language.

Risks of Naming Minor Children as Beneficiaries:

In India, children under 18 cannot directly receive life insurance proceeds because they lack the legal capacity to manage large sums of money. If a minor is named as a beneficiary, the insurance company typically will not release the funds directly to them. Instead, a court may appoint a legal guardian to manage the money until the child turns 18. This process can be time-consuming, involve legal costs, and lead to delays in accessing the funds.

Another risk is mismanagement. If the money is handed over to a guardian, there is no guarantee it will be used solely for the child’s benefit. Family disputes or financial inexperience could result in the funds being misused. Additionally, when the child turns 18, they gain full control of the money, which could be risky if they are not financially mature.

Alternatives to Naming Minors as Beneficiaries:

To avoid these issues, consider these safer options:

1. Appoint a Trusted Adult as Nominee: Name a reliable adult, like a spouse, parent, or sibling, as the nominee to receive the payout. Clearly state in a will that the money is meant for your child’s benefit, such as for education or living expenses. This ensures the funds are managed responsibly until the child is ready.

2. Set Up a Trust: Create a trust and name it as the beneficiary of the policy. A trust allows you to specify how and when the money should be used for your child, such as for education or milestones like turning 21. A trusted trustee manages the funds, reducing the risk of mismanagement. This option requires legal assistance but offers more control.

3. Use a Guardian Clause: Some policies allow you to appoint a guardian in the policy document to manage the funds for the minor. This can simplify the process, but you should still have a will to clarify your intentions.

Planning Tips

· Consult an investment or legal advisor to set up a trust or will.

· Communicate your plans to family to avoid confusion.

· Regularly review and update your nominee and will as circumstances change.

In summary, naming minor children as life insurance beneficiaries can lead to legal and financial challenges. Using a trusted nominee or a trust ensures the money is managed wisely and reaches your children as intended.

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