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How adopting a child could affect life insurance and benefits

3 minutes

Adopting a child is an exciting and busy time, but it also gives new parents a reason to review their finances. One of the things an adoptive parent should consider is how to protect their family should something unexpected happen, and whether adoption changes things. We asked our technical experts here at LV= what the effects could be.

  • Birth and adopted children’s inheritance rights are almost identical
  • Adopted children could be eligible to inherit from their birth parents
  • Parents who adopt are often eligible to Statutory Adoption Leave and Pay
 

How adopting a child could affect life insurance and benefits

Can parents take out a life insurance policy so that their adopted child is provided for if something happens?

For example: Joan (38) and Jane (35) adopt Daniel (8) and want to make sure that if one of them (or both of them) passes away, Daniel would be taken care of financially until he reached adulthood.

When it comes to their parent’s life insurance policies, adopted and birth children have equal rights. However, in either case, a trust is usually needed – especially if the child is a minor.
  
Joan and Jane could take out a joint life insurance policy (assuming they want to cover the scenario where one of them died), then place it in a trust and name Daniel as a beneficiary under the trust.

By adding a survivorship clause, Joan and Jane would make sure that if one of them passed away before the other, the money could go to the surviving parent, but if they both died together, or within a short period of time, the money could be held in a trust for the benefit of Daniel until he reaches adulthood. At that point, the trustees could close the trust and pay out any remaining monies to him directly.

Are there any age restrictions?

The only possible restrictions would be on the ages of the parents, as life insurance companies usually require a minimum age when people take out a policy.
 
But bear in mind that for a child to be considered a minor, they need to be under the age of majority (which is 16 years old in Scotland and 18 years old in England and Wales). Depending on the type of trust, if a policy is placed there for an adult beneficiary, they could ask the trustees to assign over the insurance policy directly.

What are the benefits of getting life insurance when you adopt a child?

As with a biological child, a life insurance policy allows the parents to put plans and finances in place so that, should the worst happen, a lump sum of money can be made available to the adopted child.

If an adopted child is still in touch with a birth parent, can they be named as a beneficiary?

For example: Mary’s son Mark was adopted by other people, but she still wants him to be named as a beneficiary under her policy.
 
In this case, we are looking at trusts again.

If the birth parent and child are still in touch there shouldn’t be a problem – Mary can simply name whoever she wishes to be a beneficiary of the trust.

However, it gets more complex if the parent and child have lost touch. Whoever is appointed as a trustee needs to know how to contact the beneficiary, and what their legal name is. Otherwise there could be complications in making sure that the trust assets are distributed according to the wishes of the parent.

If you are an adopted child, can you get life insurance for your parent(s)?

For example: John (45) wants to take out a life insurance policy on his adopted mother Mary’s life, so that he can pay any outstanding bills and funeral costs following her death.
 
In this scenario, it’s all about whether there is an insurable interest, so the son John would need to prove that he would personally suffer a financial loss in the event of his mother’s death.
 
Generally, funeral costs and outstanding bills are payable from the estate of the deceased (rather than by an individual directly), so it could be difficult for John to prove this when he takes the insurance policy out – especially as it would depend on factors such as his mother’s will.

You can only insure your parents if you are at or over the age of majority mentioned above.

If a parent has both adopted and birth children, does one child have different rights as beneficiaries if the parent passes away?

Generally, there has to be something specifically written into the trust for beneficiaries to have different rights, whether adopted or birth children.

However, if a parent insures their own life and doesn’t leave the policy in trust, the assets would need to be distributed according to their will. Meanwhile, if there is no will, then the estate gets distributed according to the laws of intestacy.
 
For children who have been legally adopted, exactly the same inheritance rules apply as for biological children. If there is no will, then they are entitled to inherit in the same way as biological children under inheritance rules. If there is a will, but they have been omitted, they can make a claim against the Estate, just as a biological child could.
 
The one way in which the inheritance rights of an adopted child differ from those of a biological child is that an adopted child can still inherit from a biological parent who passed away before they were adopted.

Children that have been adopted before the death of a biological parent are no longer entitled to inherit from that parent’s Estate.

If you don’t want your child to find out they’re adopted through your life insurance policy, will this information be hidden?

Yes. However, depending on the circumstances, this information could come to light following the parent’s death, when the trustees make a claim on the life insurance policy, or if the parent died intestate. 

What other financial considerations should adoptive parents have?

Adopting a child can be a lengthy process and, depending on the age of the child, there are also care arrangements to think about – especially with child care costs increasing.  Thankfully, people who adopt a child may be eligible for Statutory Adoption Leave and Statutory Adoption Pay – you can find out more on the government’s website. There’s even a useful tool to help you plan your adoption leave

Conclusion

When you’re adopting a child, the last thing you want to think about is something happening that separates you. But knowing that the new member of your family will be looked after financially, even after you’re gone, will give you peace of mind – especially as, in almost every circumstance, adopted children have the same rights to inherit as biological children.