Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Life Insurance TrustA life insurance trust works by naming a trustee to take over ownership of the life insurance policy upon the owner’s death. Please note that this is different from a living trust which is far more comprehensive. Life insurance trusts are most commonly called Irrevocable Life Insurance Trusts (ILIT).

The life insurance trust requires collaboration from three groups of people. The first is the person who is getting life insurance. That person (most likely you – i.e. the insured) will name a trustee to manage the trust account with specific instructions. Finally, the trust then names beneficiaries, who will receive the assets and benefits from the life insurance policy.

One other thing to keep in mind is that it is advantageous to have the trustee purchase the policy so that it will truly be in their name, keeping it free and clear from your estate and potential taxation. Read on to learn some more specifics of life insurance trusts and then enter your zip above to compare insurance rates online!

Why use a life insurance trust?

A life insurance trust is primarily done to exclude the benefits from a life insurance policy (i.e. the money received from the benefits of the policy) from taxable items in your estate. In other words, the trust does not tax the life insurance payout. Otherwise, the life insurance policy benefits are technically part of the estate and are thus subject to estate tax.

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What are the negatives of a life insurance trust?

However, there are certainly negatives to setting up a life insurance trust. First, as soon as the trust is established, there is not an option for the insured to change the beneficiary. Second, there will be fees associated with appointing someone as a trustee over the life insurance trust fund.

Third, the life insurance premiums will continue to deduct from the fund unless it is set up to accept payments over the span of years. Finally, the Internal Revenue Service Guidelines contain very specific requirements for life insurance trust work. If these are not met, the Internal Revenue Service retains the right to revoke the trust status, leaving the life insurance benefits open to estate taxation.

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Why not add another owner to the life insurance policy instead?

At this point, you may wonder why you would not just add another owner to the life insurance, rather than go through this trouble. However there are a few problems with setting it up this way. Consider if the person you add as an owner to the policy dies first; then the cash or termination value of their policy will simply be added to their estate and taxed as such.

Further, this person then has control to make changes to the policy: add beneficiaries, cancel the life insurance policy, or opt for the cash value. This is an unsafe option and points out yet another benefit to a life insurance trust: the security and comfort of knowing that loved ones are taken care of should an unfortunate event occur.

This may point people to speculate if they can name themselves as the trustee. While that may avoid the risk of someone changing your policy in a way you might not want them to, this does not solve the problem of taxation. If you are listed as the trustee, it is then still technically a possession of yours and can be considered part of the estate and thus taxation.

Now many may ponder how much power this appointed trustee has over the life insurance decisions. Whereas a co-owner to the life insurance policy can make changes on their own accord, a trustee can only make decisions and changes as spelled out in the life insurance owner’s instructions. For example, you could instruct the trustee to make periodic payments to the stated beneficiaries. You could even have the trustee set up lifetime payments to your spouse while keeping the money out of taxation from the estate.

Further, a person may give $12,000 each year to an unlimited number of people tax free. This allows for a substantial amount of latitude for the trust to give tax free amounts to each of the beneficiaries each year, as long as this is specifically indicated in the instructions by the owner of the trust. Simply put: the trustee only has as much power as the life insurance owner grants them.

Consult a Qualified Tax Professional for Life Insurance Trust Setup

Another point to note is that life insurance trusts are irrevocable, meaning that changes cannot be made once the agreement has been signed. It is highly recommended to consult a CPA, an estate planning lawyer, or an insurance professional with specific experience in life insurance trusts. This is perhaps a reason that many wait until later in their life to establish a life insurance trust, but it does not detract from the value and importance of this option.

One thing that you can and should do right now is compare rates on life insurance so that you can have an estimate of monthly premiums costs. Enter your zip for free quotes now!