Should You Name a Minor Child as the Beneficiary of Your Life Insurance?

For many parents, naming their children as beneficiaries of a life insurance policy seems like the obvious choice. After all, one of the main reasons parents purchase life insurance is to make sure their children are financially protected if something happens to them.

But when a child is still a minor, simply writing the child’s name in the beneficiary section can create complications that many parents do not anticipate.

A minor can be named as a life insurance beneficiary in Canada, but a minor generally cannot receive and manage a large insurance payment directly. How the money is handled depends on the province or territory and on whether appropriate arrangements were made in advance. The Financial Consumer Agency of Canada specifically recommends considering a trust and designating a trustee or administrator when naming a beneficiary who is under the age of majority.

Understanding this distinction can make an important difference in how efficiently the insurance proceeds can ultimately be used for your child.

Naming Your Child as Beneficiary Does Not Mean Giving Them the Money Immediately

A beneficiary is the person who is entitled to receive the death benefit from a life insurance policy.

If your beneficiary is an adult, the process can be relatively straightforward. Once the insurer receives the required proof and approves the claim, the insurance proceeds can generally be paid directly to the beneficiary.

A minor is different.

Children do not normally have the legal capacity to personally manage a substantial insurance payment. That means someone or some institution may need to hold and administer the money until the child is legally able to receive it.

This is why the beneficiary designation itself is only part of the planning.

What Happens If You Name a Trustee?

One option is to designate your child as beneficiary while also appointing an adult as trustee for the beneficiary.

For example, Ontario's Insurance Act specifically permits an insured person to appoint a trustee for a beneficiary through the insurance contract or a declaration.

The basic idea is straightforward: the child remains the beneficiary, while the trustee is responsible for holding the insurance proceeds on the child's behalf.

However, simply naming a trustee does not necessarily give that person unlimited discretion over the money.

In Ontario, the Office of the Children's Lawyer explains that the terms of the beneficiary designation can determine whether the trustee is permitted to make payments for the child's benefit and when the money must ultimately be transferred to the child. If the designation contains no additional trust terms, the trustee may only be permitted to hold and invest the money until the child turns 18, rather than spending it for the child's benefit.That distinction matters.

A parent may imagine that the money could automatically be used by the trustee for expenses such as housing, education or other needs while the child is growing up. The legal arrangement may not necessarily work that way unless it has been structured appropriately.

What If You Do Not Name a Trustee?

This is where an apparently simple beneficiary designation can become more complicated.

The Financial Consumer Agency of Canada explains that when a minor beneficiary has no trustee or administrator, the province or territory may hold the death benefit in trust until the beneficiary reaches the age of majority.

The exact procedure varies by jurisdiction.

For example, in Ontario, if no adult trustee has been named and a child is entitled to more than $35,000, the money is generally paid into court and managed by the Accountant of the Superior Court of Justice.

Imagine a parent with a $750,000 life insurance policy intended to help support a young child for many years. The parent may have expected a trusted family member to use that money for the child's living expenses, education and other needs.

Simply naming the child as beneficiary does not necessarily accomplish that objective.

Consider What Happens When the Child Becomes an Adult

There is another planning issue that is easy to overlook: when should your child actually control the money?

Receiving a substantial inheritance at 18 is very different from receiving it at 25, 30 or gradually over several years.

A life insurance death benefit could potentially represent hundreds of thousands or even millions of dollars. Even a responsible 18-year-old may not yet have the experience to manage that amount of money.

This is no longer just an insurance question. It becomes an estate-planning question.

Parents who want more control over how and when money becomes available to their children may need a more detailed trust arrangement as part of their estate plan. A lawyer can help determine how that structure should be created and coordinated with the beneficiary designations on the insurance policies.

The Beneficiary Designation Should Match the Purpose of the Insurance

When purchasing life insurance, much of the conversation understandably focuses on how much coverage is needed.

If you have young children, you may calculate an amount intended to replace income, pay the mortgage, cover education expenses and provide financial support while the children remain dependent.

But deciding that you need $500,000, $1 million or another amount is only the first part of the planning.

You should also consider who receives that money and how it can be used if you die while your children are still young.

The beneficiary designation should therefore be reviewed alongside your overall insurance and estate planning rather than treated as an administrative box to complete when the policy is issued.

It is also worth reviewing beneficiary designations periodically. The Government of Canada recommends reviewing them from time to time and updating them when necessary. A designation that made sense when your child was three years old may no longer be appropriate when that child is 20.

Life Insurance Planning Goes Beyond Choosing a Policy

Life insurance is ultimately intended to solve a financial problem. Making sure the death benefit reaches the right people under an appropriate structure is part of making the insurance work as intended.

If you have minor children, review not only the amount and type of insurance you own, but also your beneficiary and trustee designations and how they coordinate with your estate plan.

Pedro Diaz Ramos can help you review your existing life insurance coverage, beneficiary designations and overall insurance needs, and identify areas that may need to be discussed with your lawyer or other estate-planning professional.