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We all know it is a good idea to have life insurance. When we pass, especially if it is sudden or unexpected, having life insurance protects our families by leaving them some money to help pay for funeral and burial costs as well as have some money for living expenses.

However, with estate taxes being as high as 35%, more then one third of our insurance pay out goes back to the government.

life insurance trustA life insurance trust is an excellent way to give your family the protection that they need.

At Life Insurance by Jeff, we get a lot (and we welcome all of them!) of questions about life insurance trusts and the benefits of these trusts. So, hey, I guess it’s time we hit some of those questions right here.

Let’s look at the different factors of a life insurance trust and the benefits and disadvantages of these plans.

What Is A Life Insurance Trust?

A life insurance trust can be set up to avoid having to pay any estate taxes on the policy distribution. When a life insurance trust is in place, the beneficiaries get 100% of the policy value rather then 1/3 of the money going to estate taxes. With a this kind of insurance, someone needs to be designated as the trustee and this person controls the trust and distributes the pay out to the beneficiaries. While a life insurance trust might sound like a no-brainier, there are some drawbacks.

Preexisting Policies

Trusts are typically not able to be transferred to life insurance policies that are already in place. If a person chooses to set up a trust for a current policy, they must live for at least three years after the trust is established or they will still be charged estate taxes on the payout. There are also other penalties and taxes that are charged on policies that were already in issuance beyond the three-year period. It is best, and recommended that trusts be set up for new life insurance policies only.


Once a life insurance trust is established, the owner of the policy gives up the right to change the beneficiary of the policy. The trust becomes the beneficiary and the trustee has control over the distribution to the predesignated beneficiaries of the life insurance policy. While most people make their spouse or children their beneficiary, in the event of divorce or a falling out with a family member, nothing can be changed.

This is one of the most notable disadvantages of a life insurance trust that you won’t run into with many other life insurance plans. More than likely, you won’t ever have to change the beneficiary of your life insurance policy, but at least you have the option with a traditional plan. With a life insurance trust, once those papers are signed, that’s it. There is no changing the coverage. As long as you’re comfortable with that idea, then these trusts could still be a good option for you.

When you’re setting up one of these trust, make sure that you make the best decision for your beneficiary. Because you can never change it, you should ensure that you’re making the best decision for who is going to receive the trust when you pass away.

Other Considerations

Life insurance trusts can not be borrowed against like most typical life insurance. So while having the trust established will avoid estate taxes later on, if one might need the money for an emergency or medical care, then this is a factor that needs to be considered. Trusts are also irrevocable, so once the policy is established, it can not be canceled. This is something to consider as well.


Because a policy holder can not control the trust of their life insurance policy, they must designate a trustee. Typically, one must be hired and this costs money. If the policy is complicated, the policy holder should decide if the benefit of paying for a trustee outweighs the benefit of avoiding estate taxes. Most trustee’s for life insurance trusts do not charge expensive fees because they have to relatively little to maintain the trust.

Life insurance trusts are a solid commitment that you’re locked into once you sign the paperwork. In most cases, these aren’t going to be the best option for your family’s insurance coverage. With other types of life insurance coverage, you won’t be restricted on the changes that you can make for your policy.

With an insurance trust, one of the unique advantages of these plans is that your health won’t play a role in your purchase, like it will with a traditional policy. With a normal life insurance plan, you’ll be required to take a medical exam. After you get your results, you’ll see they have a very direct relationship with the costs of your insurance.

Deciding Which Life Insurance Option Is Right For You

Deciding which kind of life insurance coverage is right for you can be an overwhelming and difficult process, but it’s important.

There are several types of life insurance protection that you can buy and thousands of different life insurance companies on the market that you can choose from. (Of course, we can help you here.)

The first question that you’ll need to ask yourself is, “how much do I want to spend on life insurance?”

If you want to get the cheapest life insurance coverage available, then an insurance trust isn’t going to be the best option. Instead, a term insurance policy will save you thousands of dollars policy. Term insurance plans are going to be significantly less expensive than other options.

The next factor that you should look at is how long will you need life insurance. Life insurance trust will obviously give you coverage as long as you live, but maybe you won’t need life insurance that long. A lot of people reach a stage of life where they no longer need a life insurance plan, which means that you could be paying for insurance that you don’t really need.

Life Insurance Trusts – What You Need To Know

Life insurance trusts can be as simple (or complicated) as you make them.

If you think it’s something really above you head, get help, and find a person who can walk you through the entire process, step-by-step. It might cost you more, but it might save you (and your heirs) significantly more than if you did it on your own, and did it incorrectly.

Also, consider having your loved ones with you when you do go to set it up, so you can clarify any necessary details ahead of time. If you can, this is going to greatly impact those little contingencies which can arise years down the road.

Be proactive, and protect what you’ve earned, as well as what you will pass along some day in the future.