PSI Ohio Insurance Practice Exam

What is a common solution for the issue of naming a minor as a beneficiary on a life insurance policy?

1. Direct payment to the minor

2. Creating a trust to manage the proceeds

3. Establishing a joint account

4. Including a guardian as the primary beneficiary

The correct answer is: Creating a trust to manage the proceeds

Naming a minor as a beneficiary on a life insurance policy presents unique challenges, primarily because minors are not legally able to manage the proceeds of an insurance policy until they reach the age of majority. Creating a trust to manage the proceeds is a common solution because it allows for a responsible adult or organization to manage the funds on behalf of the minor until they are old enough to handle them personally. A trust can be specifically tailored to meet the needs of the minor, ensuring that the funds are used for their health, education, maintenance, and support until they reach a specified age. This provides a structured and secure way to manage the assets, protecting the interests of the minor and ensuring that the life insurance benefits are used appropriately. Other solutions, such as direct payment to the minor, may not be feasible due to the lack of legal capacity, while establishing a joint account would typically not address the issue of management of funds for a minor. Including a guardian as a beneficiary might ensure that an adult is involved; however, it doesn’t provide the same level of structured management that a trust would offer. Thus, setting up a trust is a widely accepted and effective strategy for handling this particular issue.