Life Insurance Trust (Terms Explained)
Quick Facts
A life insurance trust is a trust that is funded by your life insurance policy
The trustee of your life insurance trust will distribute the trust assets according to your wishes
There are two main types of life insurance trusts: irrevocable and revocable
The ability to buy a life insurance trust is one of the many benefits of buying life insurance. Life insurance trusts allow the trustee to distribute the life insurance death benefit according to the insured person’s wishes and generally cost about $750 to set up. A life insurance trust is especially useful to parents who want to leave money to their underage children or the care of other loved ones. Read on to learn more about how life insurance trusts work.
Understanding Life Insurance Trusts
Regardless of your life insurance type, life insurance trusts work the same. Below is a detailed list of how life insurance trusts work, from the purchase and setup to the trust distribution process after you file a life insurance claim.
The trustee of your life insurance trust can be the life insurance company or a person, such as a loved one or a lawyer. The beneficiary of life insurance trusts can also be whoever you wish, so it is up to you who you want to manage your life insurance trust and who you want to receive your trust funds. For a full explanation of other common life insurance terms you may see on your policy, you can visit our life insurance terms and definitions guide.
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Two Basic Types of Life Insurance Trusts
There are two different types of life insurance trusts that you can choose between. The first type is an irrevocable life insurance trust. This type of life insurance trust can’t be changed or canceled after purchase, limiting a customer’s flexibility with how they use their life insurance trust. However, the benefit of an irrevocable life insurance trust is that taxes can be lowered or eliminated altogether on these trusts.
The other type of life insurance trust, a revocable life insurance trust, is more flexible. The policy owner can change a revocable life insurance trust whenever they desire, whether it’s adding beneficiaries (read our guide on can you change your life insurance beneficiary for more information) or adding to your life insurance trust fund. Both of these trusts have advantages and disadvantages, so it’s important to thoroughly research which is better for you before purchasing a life insurance policy trust.
Cost of a Life Insurance Trust
Life insurance trusts require an initial set-up fee and monthly payments, or the policy will become void. The average cost for a life insurance trust is as follows:
If you already have a life insurance policy with a company, it is cheaper to purchase another life insurance policy from the same company, as adding on a policy averages only $42 extra a month. Purchasing a policy from one of the best cheap life insurance companies will also help reduce monthly costs.
Circumstances When Owning a Life Insurance Trust Makes Sense
Not everyone needs to own a life insurance trust, but there are a number of situations when it makes sense to have a life insurance trust on your policy.
You want to ensure that your beneficiaries are cared for after you pass if they can’t handle your assets independently, such as leaving a trust to fund the care of underage children or children with special needs.
You want to control how your life insurance policy funds are handled after you pass.
You want your life insurance policy funds to be mostly tax-free or completely tax-free to minimize the amount lost to taxes.
You want probate avoidance, where the assets are handled outside of probate court, allowing the trust to be handled out of the public eye (read our guide on does life insurance go through probate for more information).
If you have a substantial amount of money you want to be handled by a trust rather than a less controlled method like a life insurance will, then a life insurance trust may be right for you.
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Benefits of Owning a Life Insurance Trust
There are numerous benefits to having a life insurance trust. Some of the main benefits of owning a life insurance trust are as follows:
As we briefed over earlier, one main benefit of a life insurance trust is that you can control how your beneficiaries receive funds. For example, you could release part of your life insurance trust for a child when they turn 18, another part when they turn 25, and so on. You can read our guide on how to name a minor child as a life insurance beneficiary for more information.
Alternative Ways to Fund a Trust
A trust does not have to be funded by your life insurance policy. Some of the other ways you can fund your trust are through the following:
Cash deposits
Real estate investments
Stock investments
It is up to you which is the best method for funding your trust. For example, you could only deposit cash into your trust, or you could deposit cash and use some of your stock investments as funding.
The Bottom Line: Life Insurance Trusts
Life insurance trusts can be a useful tool for those looking for a way to control the release of assets to beneficiaries, lessen the tax burden on their assets, and keep the allocation of funds out of public record. If a life insurance trust isn’t the right choice for you, there are also plenty of other ways to fund a trust, such as with cash deposits.
Frequently Asked Questions
What is a trust in a life insurance policy?
A trust in a life insurance policy means that a trustee, whether a company or a lawyer, will handle the distribution of assets according to the insured’s wishes.
What is the disadvantage of a life insurance trust?
Life insurance trust disadvantages are that they can be expensive to set up, and the insured can’t change details with an irrevocable trust.
Can I create a life insurance trust if I already have life insurance?
Yes, you can create a life insurance trust if you already have a life insurance policy.
Is it better to put life insurance in trust?
Trust-owned life insurance can be a good option for life insurance policyholders, as it helps reduce taxes on the life insurance death benefit.
Is life insurance part of my estate?
Yes, life insurance is part of an estate, so if you have a policy or a trust, you will likely have to file a life insurance trust tax return unless your policy is tax-free.
How does a life insurance trust affect taxes?
Life insurance trusts can help with tax-efficient estate planning by reducing the amount of taxes paid.
How do I name a life insurance trust beneficiary?
When creating a life insurance trust, you will be asked who your beneficiaries are, whether it’s a spouse or child.
Can a life insurance trust be modified or revoked?
A life insurance trust can only be modified or revoked if it is a revocable life insurance trust.
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Rachael Brennan
Licensed Insurance Agent
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
Benjamin Carr
Former State Farm Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs.
Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times…
Former State Farm Insurance Agent
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