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.

Full Bio →

Written by

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

Full Bio →

Reviewed by Daniel Walker
Licensed Auto Insurance Agent Daniel Walker

UPDATED: Mar 19, 2020

Advertiser Disclosure

It’s all about you. We want to help you make the right coverage choices.

Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance provider and cannot guarantee quotes from any single provider.

Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance providers please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

Irrevocable Life Insurance TrustAn Irrevocable Life Insurance Trust (ILIT) is simply explained as a way of having a life insurance policy that does not hold any estate tax consequences for your beneficiaries.

However, an Irrevocable Life Insurance Trust is anything but simple. There are several complex laws involved regarding estate tax and gift tax, so it is always a good idea to discuss certain legal issues with an attorney or CPA that specializes in those particular fields.

This article will explain a life insurance policy, an Irrevocable Life Insurance Trust, and the benefits of each one. Since there are many statutes related to trusts, this article is merely intended to provide a better understanding of what the differences are between regular life insurance and an ILIT; it is not meant to counsel or advise you on which method is better for you.

One thing is for sure and that is that finding the best insurance rates involves shopping around and doing your homework. Use the free quote tool on the top of this page to make your life insurance search an easy one!

A Simple Life Insurance Policy

Life insurance policies are simple enough to understand; they are a way of providing an income source of sorts for your beneficiaries after you die. Typically, life insurance policies are purchased by spouses with each other listed as the beneficiary. It is also common for spouses to take out life insurance policies on each other when they have children for whom they need to provide.

For example, if a man and wife are married and have two children, each parent may take out a $100,000 life insurance policy, naming each other as the beneficiary. That way, in the event that one parent dies, the other parent will receive the $100,000 death benefit from the life insurance policy and be able to continue to provide for the children for some time without financial worries.

Spouses are not the only people who buy life insurance policies. Life insurance policies can be obtained by just about anyone for anybody. Some people have life insurance policies on their children, their parents, their siblings, and sometimes even friends or employees.

There are several life insurance products that you can buy, but usually it comes down to two kinds of policies: whole life or term life. Whole life insurance is purchased with the intent of a lifelong policy and term life insurance is purchased for a specific set of time. This means that if you are thirty-years-old and you buy a whole life insurance policy for yourself, you will have this policy for the remainder of your life so long as you continue to pay the premiums for it.

On the other side, if you are thirty-years-old and you purchase a term life policy for, let’s say, twenty years, then you will have a life insurance policy until you are fifty-years-old. If you survive past fifty, there is no death benefit to be paid and your life insurance policy will terminate. Parents often take out term policies to cover only the period of time when their children will be most dependent on them.

Compare Insurance Providers Rates to Save Up to 75%

secured lock Secured with SHA-256 Encryption

An Irrevocable Life Insurance Trust

A trust is a way of putting money aside for someone in a way that keeps the beneficiary monetarily responsible. Many wealthy people create trusts for their heirs instead of giving them all of the money at one time to spend haphazardly. A trust is established as a way of holding the funds until certain requirements are met.

Sometimes a trust is paid out when an heir turns legal age; other times the trust is only funded via distributions so that there is a steadier stream of income instead of a windfall. A life insurance trust is created in a similar fashion, but usually for different purposes. Usually when someone creates an ILIT it is part of estate planning to avoid taxation on the estate.

Instead of purchasing a standard life insurance policy that pays out a death benefit to your beneficiaries upon your death, you can invest in an ILIT. An ILIT is usually setup with the help of an attorney and differs from regular life insurance in several ways. When the Trust is established, the money that is set aside for your beneficiaries goes into a virtual holding bin.

After you die, the money from this holding bin is disseminated in whatever fashion you ordered at the time you created or last revised your ILIT. While it would appear from this that the only difference between a life insurance policy and an ILIT is how much money is claimed in a single instance, there is another big difference involved, and that is related to how the benefit gets taxed.

Free Insurance Providers Comparison

Compare Insurance Providers Rates to Save Up to 75%

secured lock Secured with SHA-256 Encryption

The Differences and Benefits of Life Insurance and the Irrevocable Life Insurance Trust

In general, life insurance policies are purchased by you and maintained by you, and they usually build cash value that you can even borrow against at some point during your life. The benefits of a standard life insurance policy are appealing, but there is one factor that not everyone considers, and that is the taxation of your benefit payout. If you buy a life insurance policy to help financially support your loved ones, then you may be disillusioned to discover that your loved ones are going to pay some hefty taxes on the death benefit gained from your life insurance policy.

Life insurance policies are part of your estate, and when you die everyone who inherits a part of your estate will be subject to paying estate taxes to the government. This means that if you leave your house to your wife and your life insurance policy gets paid to your adult children, then your wife will have to pay estate taxes on the value of the house and your kids will have to pay estate taxes on the value of the life insurance benefit.

This potential disadvantage of a life insurance policy really depends on how much money the total estate is worth and what financial situation you and your beneficiaries are in at the time of your death. Also, you should be aware that if your beneficiaries are claiming any state funded assistance, such as Medicare, your death benefit could place their income level too high to continue to receive assistance and they may be terminated from the plan. Since there is usually no way to foretell the circumstances, you will need to make an educated decision on what is best for you and your family.

Unlike standard life insurance policies, an ILIT is not part of your estate and is therefore not part of the taxable estate income or the hereditary tax. This is mainly because the trust is established in someone else’s name and placed under someone else’s control, which removes it from your own estate. This method allows your beneficiary to benefit from your life insurance policy without having to pay income tax on the claim payout. However, depending on how much money is involved, your beneficiaries can be penalized by the gift tax, although in order to be taxable the gift amount must be quite sizable.

In addition to lowering your tax liability by lowering your overall estate value, an ILIT can help protect the cash value that has built up in you life insurance policy by keeping your creditors at bay. Since the policy is not owned by you, people to whom you are financially indebted are unable to pursue your policy as an option for payment.

There are benefits and disadvantages to both standard life insurance policies and Irrevocable Life Insurance Trusts. The decision between which one is right for you will depend on how much control you want to have over the policy, how much value is involved in your overall estate planning, and what tax implications there are for your beneficiaries.

The first step in deciding which method to choose is to simply get started exploring your options by requesting some free rates now from various life insurance companies. Enter your zip to start!