Can Children Inherit Life Insurance?

Yes, children can inherit life insurance proceeds, but the mechanics depend on who owns the policy, how beneficiaries are named, and applicable state regulations.

Policy ownership and beneficiary designations

If the policyholder names a child directly as the primary beneficiary, the insurance company will pay the death benefit to the child upon the insured's death. Most insurers, however, require a legal guardian or custodian to manage the funds until the child reaches the age of majority, typically 18 or 21, depending on the state.

Using a trust for minor beneficiaries

Many policyholders establish a revocable or irrevocable trust naming the child as the ultimate beneficiary. The trust holds the proceeds, and a trustee controls disbursement according to the trust terms, providing protection against premature spending and ensuring the money is used for the child's education, health, or other needs.

State laws and the Uniform Transfers to Minors Act (UTMA)

In states that have adopted the UTMA, a custodial account can be opened for the child. The insurer pays the benefit into this account, and the custodian manages it until the child reaches the age specified by the act, usually 21.

Tax considerations

Life insurance death benefits are generally income‑tax‑free for the beneficiary. However, if the proceeds generate interest after receipt, that interest is taxable. Estate taxes may apply if the policy's death benefit is included in the deceased's taxable estate.

Practical steps for policyholders

• Review and update beneficiary designations regularly.
• Consider naming a trust or custodian for minor children.
• Consult an estate attorney to align the policy with overall estate plans.
• Check state-specific rules on minor beneficiaries and custodial accounts.