Life Insurance Trust: What It Is and How It Works


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Key Takeaways

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A life insurance trust manages and distributes a life insurance policy's proceeds post-death, avoiding probate and minimizing estate taxes.

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You can alter revocable life insurance trusts, but you can't change irrevocable life insurance trusts. Irrevocable insurance trusts offer more tax benefits and asset protection but less flexibility.

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Life insurance trusts suit those who prioritize asset control and tax savings. They may be less beneficial for those who need more flexibility or have minimal estate tax concerns.

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What Is a Life Insurance Trust?

A life insurance trust is a legal arrangement where a third party, or designated life insurance trustee, manages the distribution of your life insurance policy proceeds after your death. It is an effective way to ensure your life insurance payout reaches your intended life insurance trust beneficiaries.

When you pass away, the trust-owned life insurance receives the policy payout, which the trustee then allocates to your chosen beneficiaries based on the terms you've set.

Types of Life Insurance Trust

There are two main types of life insurance trusts: irrevocable and revocable. These two differ in flexibility and control.

Understanding the differences can help you make an informed decision about which one aligns best with your financial goals.

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    Irrevocable Life Insurance Trust

    An irrevocable life insurance trust (ILIT) is a trust that's difficult to change or end once it's set up. Irrevocable life insurance trust benefits include the potential for your family to sidestep estate taxes because the ILIT isn't part of your estate, making ILITs a valuable tool for protecting your wealth for future generations.

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    Revocable Life Insurance Trust

    A revocable life insurance trust gives you more control: you can modify or cancel it at any time. But its payouts may be subject to estate taxes. It's a solid choice if you want flexibility with your policy and aren't overly concerned about estate taxes.

How Does a Life Insurance Trust Work

Setting up a trust for life insurance allows you to control how your policy’s death benefit is handled and distributed. Here’s how it works:

  1. 1

    You Set Up the Trust

    Start by setting up a trust for life insurance, naming the trust as both the owner and beneficiary of your policy. This ensures that when you pass away, the proceeds go directly into the trust rather than your estate.

  2. 2

    You Appoint a Trustee

    Next, you choose a trustee: someone responsible for managing the trust and distributing the funds according to your wishes.

  3. 3

    Proceeds Go Into the Trust

    Upon your death, the insurance payout bypasses probate and is deposited directly into the trust.

  4. 4

    Trustee Distributes the Funds

    Your trustee then follows the instructions you laid out, ensuring your life insurance trust beneficiaries receive the money as intended: whether all at once or in staggered payments.

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WHY USE A TRUST FOR LIFE INSURANCE?
  • Avoid Probate: The payout doesn’t go through probate, so your beneficiaries get faster access to funds.
  • Reduce Estate Taxes: If properly structured (especially with an irrevocable trust), the death benefit may not be counted as part of your estate.
  • Maintain Control: You decide how, when, and to whom the money is distributed. This is ideal if you want to stagger payments over time or protect minor children.

Pros and Cons of Life Insurance Trusts

If you're considering putting your life insurance into a trust, review the advantages and disadvantages. The benefits are appealing, but the drawbacks may outweigh them depending on your situation.

Advantages of Life Insurance Trusts

Putting your life insurance in a trust can provide additional protection and help maximize your policy's benefits.

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    Avoiding Probate

    By placing your life insurance policy in a trust, you can sidestep probate, or the legal process that handles a deceased person's assets, pays debts and distributes what's left to heirs. This gives your beneficiaries faster access to funds without court delays.

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    Tax Efficiency

    Putting life insurance in a trust could help minimize or avoid estate taxes.

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    Control

    A trust allows you to set the rules on how the policy payout is distributed after your death.

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    Protection From Creditors

    With trust-owned life insurance, the assets are protected from creditors since you no longer own the policy. Once transferred into the trust, the funds remain off-limits to your creditors.

Disadvantages of Life Insurance Trusts

Life insurance trusts aren't right for everyone. Consider these disadvantages to ensure it's the right move for you.

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    Complexity

    Setting up and managing a trust may be complicated and require legal assistance.

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    Loss of Control

    Once you place a policy in an irrevocable life insurance trust, you can't change or cancel it.

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    Costs

    Setting up a trust involves initial costs like legal and notary fees. You'll also pay ongoing expenses such as trustee fees and administrative costs for updates or changes.

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    Losing Access to the Policy’s Potential Cash Value

    Once your life insurance policy is in a trust, especially an irrevocable one, you can't access its cash value. This can be a problem if your financial circumstances change and you need the money.

Who Should Put Life Insurance in a Trust?

A life insurance trust involves evaluating your financial goals and family needs. This setup offers advantages, but it's also complex.

Life Insurance Trusts May Be for You If:

  • You want your beneficiaries to receive funds quickly without probate delays.
  • You want to minimize or eliminate estate taxes for your heirs.
  • You want structured control over how and when your policy assets are distributed.
  • You have a large estate and want privacy and creditor protection.

Life Insurance Trusts May Not Be for You If:

  • You prefer flexibility with your policy and might want to change beneficiaries or coverage later.
  • You're concerned about the initial and ongoing costs of creating and managing a trust.
  • Your estate isn't large enough to worry about estate taxes.
  • You may need to access the cash value of your life insurance policy for personal financial needs.

How to Put Life Insurance in a Trust

Putting life insurance into a trust involves several steps, but the process is straightforward when you know what to expect.

  1. 1

    Understand What a Trust Is

    Start by learning the basics, including how trusts work and the difference between revocable and irrevocable life insurance trusts.

  2. 2

    Consult a Professional

    A lawyer or financial advisor with estate planning experience can help you understand the nuances and guide you through the process. Discuss your goals with them to make an informed decision.

  3. 3

    Choose the Type of Trust

    Based on your objectives and the advice of your professional, decide whether a revocable or irrevocable life insurance trust is best for you.

  4. 4

    Set up the Trust

    Create a trust document that details how the trust operates, who the trustees and beneficiaries are and what assets it holds. The document must be signed in front of a notary.

  5. 5

    Transfer the Life Insurance Policy to the Trust

    Complete the paperwork to move your policy into the trust. This may need notary or lawyer supervision.

    Most life insurance policies can be transferred into a trust, including term life and permanent life insurance policies like whole life, universal life and variable life.

  6. 6

    Choose a Trustee

    Your trustee will manage the trust, so choose someone reliable and capable. You can also hire a professional trustee like a lawyer or accountant.

  7. 7

    Inform Your Beneficiaries

    Let your loved ones know about the life insurance trust. This helps avoid surprises and ensures they understand what to do when the time comes.

Alternatives to Life Insurance Trusts

Life insurance trusts aren't your only option. Consider these simpler alternatives for managing your life insurance policy.

  • Beneficiary Designations: Directly naming beneficiaries on the policy ensures they receive the payout without going through probate, though this method offers less control compared to trusts.
  • Joint Ownership of Policies: Sharing policy ownership with someone, typically a spouse, can simplify the transfer of benefits without needing a trust.
  • Testamentary Trusts: These are trusts established within a will and take effect after death, providing some control over the insurance payout.
  • Gifting Policies: Transferring ownership of a life insurance policy to someone else during your lifetime removes it from your estate, potentially avoiding estate taxes. However, it might have gift tax implications.
  • Entity Ownership: Having a business entity own the policy can be a strategic part of business succession planning.

These alternatives offer different levels of control, tax benefits and complexity. This allows you to choose an approach that fits your specific circumstances and preferences.

Life Insurance Policy in Trust: Bottom Line

A life insurance trust is a valuable tool for managing your policy's payout. By naming a trust as the beneficiary, you can bypass probate, minimize estate taxes and ensure the death benefit is distributed exactly as intended, giving your loved ones both protection and peace of mind.

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Understanding Life Insurance Trusts: FAQ

Knowing your options can help you protect your life insurance beneficiaries. We answered some of the most frequently asked questions about putting life insurance into a trust to give you a better understanding of how they work and whether they could be a good fit for you.

What is a life insurance trust?

What happens if a life insurance beneficiary is a trust?

Why use a life insurance trust instead of a beneficiary?

How do you put your life insurance policy into a trust?

Can you change your mind after putting your life insurance in trust?

What are the disadvantages of putting life insurance in trust?

How to set up an irrevocable life insurance trust?

Should a life insurance beneficiary be a trust?

What would be a valid reason for naming a trust as the beneficiary of a life insurance policy?

Are life insurance proceeds taxable to a trust?

Can a trust be a beneficiary of a life insurance policy?

Who should be the owner of a life insurance policy?

Can you put a joint life policy in trust?

Does a trust override a life insurance beneficiary?

What is the role of the life insurance trustee?

Can you use a life insurance trust for a child?

Can you have family trust life insurance?

Top Life Insurance Trust Providers: Our Review Methodology

Why Trust MoneyGeek? We analyzed 1,488 life insurance quotes alongside customer satisfaction, financial stability reports, product offerings and more to determine the best  life insurance companies.

MoneyGeek created a scoring system to compare life insurance companies across five categories and ranked them based on their scores. We chose to review these companies based on their broad national coverage and ability to provide an online quote.

MoneyGeek’s Scoring System

In our unique scoring system, companies can earn up to five points in each of five categories. We then use these category scores to calculate an overall MoneyGeek score out of 100. We applied the following weightings to score insurers:

  • Affordability: 30%
  • Financial Stability: 25%
  • Buying Process: 20%
  • Customer Satisfaction: 15%
  • Product Diversity: 10%

Each company’s score incorporates:

  • Cost data obtained through online quotes
  • Financial strength ratings from AM Best and number of years in business
  • Customer satisfaction data from the National Association of Insurance Commissioners (NAIC) customer complaint index (we reviewed annual complaint data from 2020 to 2022, the most recent year available)
  • Availability of tools to aid in the buying process, such as online product materials and multiple payment options
  • Diversity of life insurance products offered

Sample Customer Profile

MoneyGeek used a standard profile to obtain life insurance quotes:

  • 40-year-old man
  • Non-smoker
  • 5 feet 11 inches tall and 175 pounds
  • Excellent health rating

Premiums are based on the standard profile unless otherwise noted.

We modified the profile by age, gender, height, weight, tobacco use, health rating and geographic location to collect a variety of quotes and determine the best life insurance company for several types of customers. We collected quotes for term life insurance with varying term lengths and coverage amounts as well.

We identified trends in the data set and used those patterns to calculate projections and extend the data beyond what was originally collected.

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About Melissa Wylie


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Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney.

Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.


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