Funding a Trust with Life Insurance

One way of funding a trust is through a life insurance policy. Instead of naming your kids or dependents as beneficiaries on your life insurance policy, you can name the trust and there may be some benefits. A designated trustee will manage the trust assets.
By Samuel B
Updated Dec 9, 2020
funding a trust with life insurance
Why trust our opinion?

Our content follows strict guidelines for editorial accuracy and integrity. Learn about our and how we make money.

When you hear trust, you may think it outside of your reach or that trusts are reserved for people with assets, estates, and lawyers. However, a trust provides guidelines of executing a will and it ensures your assets are given care and intention. The truth, a trust is for everyone. You can fund a trust in many ways, including:

  • Estates, a sale of your home

  • Assets, cars, valuable jewelry, high value items

  • Investments, any of your stocks and bonds.

Life insurance is another option to look at. A life insurance policy can fund a trust, and give direction to your death benefit. And since an insurance policy is relatively cheap, it is within everyone's reach. What does this mean for you?

It means, you should consider what to do with your life insurance, and add it to a trust. 

Find the right plan for you!Compare insurance carriers in your area. It's 100% free.Get Quotes

Types of Trusts

There are many types of trust to choose from, and each satisfies a specific goal. The two primary classifications of trusts, revocable and irrevocable. The trustor, or creator, of the trust can alter, change, or even revoke the trust at any time while they are living. Giving revocable trust its alternate name, a living trust.

When the grantor dies, the trust becomes an irrevocable trust. This is important, because it can affect what happens to your life insurance. Without a trust, a life insurances pay to the beneficiary or legal guardian upon your death. If a guardian is not explicitly named, the process can be,

  • Time consuming

  • Expensive

  • Confusing

Leaving your children or spouse without a clear future.

By establishing a living trust, you can detail the exact execution of your life insurance. Keeping the court, and the legal fees, out of consideration. And by keeping it a living trust, you can 

  • Change the trustee at any time. 

  • Determine wealth disbursement

  • Divvy estate

  • Provide guidance on how, and when money is distributed

Keeping a living trust for your life insurance ensures the care and well-being of your dependents.

To get the right trust for you, you need to know what type of life insurance you have.

Types of Life Insurance

There's two main types of life insurance, term and whole. Term life is cheaper for most Americans, but a whole life plan may be better for you. It depends on many factors including your health, age, and financial situation. The two have one important difference, which is how long the policy lasts.

Term Life Insurance

Term life insurance is as the name implies. You buy insurance for a period of time, anywhere between five to thirty years. If you pass within that period of time, they pay out the death benefit to your beneficiary.

Term life is often cheaper than whole life insurance, making it a good choice for most. PolicyScout can help you learn more.

Whole Life Insurance

Whole life insurance is a policy that endures throughout your life. There is no time-frame that your insurance will lapse and your beneficiary will receive the benefits upon your death. Purchasing one when you are younger can lock in lower rates that disappear when you get older. No matter which you choose, life insurance is important to protect your family.

Whole Life or Term?

Whole Life

  • Cheaper if purchased young

  • No need to renegotiate

  • Peace of mind

Term Life

  • May be cheaper, depending on term length and time of purchase

  • Can cancel if you no longer need it

  • Peace of mind

If you don't have life insurance, you should consider it. Life insurance has one unique quality to it. If you need it, it pays out more than you put into it. Other policies insure tangible, replaceable assets. If your car is damage, you receive money to either fix it, or replace it. In the end, you still pay monthly insurance for the service. 

Life insurance in the strictest sense, insures your value. Once it's lost, it cannot be replaced. By putting some money aside each month, you insure your loved ones don't lose anything more. No matter which you choose, you're buying some peace of mind. For you and your family. For a low monthly rate.

Why Fund a Trust with Life Insurance

There's many reasons and many ways to fund a trust, but using an insurance policy has a few benefits to it.

The primary reason being that a life insurance policy can be immediately liquidated. Real estate needs buyers, investments need market conditions, and assets need valuation. This also takes time and a level head. A commodity your family may not have. By providing wealth to your family immediately, they can pay off major expenses such as:

  • Burial Costs

  • Legal Costs

  • Estate Closure

  • Estate Taxes

  • Many more

One other benefit that is worth more than its monetary value; freedom and time for your family to grieve. Real estate markets fluctuate, and waiting for the best time to sell is important. Investments are long term and can benefit your family years in the future, much more than now. And, it can help to pay your taxes.

Disbursement from life insurance policies are tax free, and can help ease the burden of tax payments. Another benefit, the policy can fund the appointment of a trustee. Appointing a trustee allows someone to manage the funds on behalf of minor beneficiaries. The trustee protects the money, ensures the proper disbursement, and protects your children. Young families are not able to fund a trustee normally. With a life insurance policy, they can.

How to Fund a Trust with Life Insurance

So, how do you do it? How do you set up a trust with a life insurance policy? It's simple. There are a few first steps to take:

  • Evaluate your estate

  • Set up a will and powers of attorney

  • Consider a trustee

  • Fund the trust

A will is only useful if you know what you have to say and what you have to give. Talk with your spouse and decide on what's important to you. Then, talk to an accountant to start the process of estate planning. Once you know what you want, and what you own, it's time to set up a will. A will is your legal testament. It is the declaration of your legal intents, for what happens after you pass. How your assets are handled, children cared for, any funeral requests. Your responsibilities taken care of. It is when you designate the beneficiaries. Once you draft a will, you need to choose someone to enact it. The power of attorney enables someone you appoint to enact your will. This is a position of trust and responsibility. Whoever you appoint is the legal guardian of your will.

Next, consider a trustee.

A trustee is someone you employ with the power of attorney to enact your trust. A trustee should be in good health and sound mind. Someone who has the wherewithal to follow through with your will. It should be someone you trust, though it need not be with someone you are close with. An attorney, law firm, or legal entity are good choices for a few reasons. Primarily, they are impartial. Also, your state holds them to specific standards, and can lose their practice for failing to follow through. Debarment occurs through unethical, criminal, or negligent actions and removes their ability to practice law. This is typically sufficient reason to ensure your will is followed through.

Barring that, if you do appoint a trustee that's a single person, make sure to appoint a secondary trustee. One that can take up the role if the primary trustee is no longer able. All that's left is to fund the trust

The instant liquidity of life insurance policies is vital here. The trust is funded immediately and the disbursement is already legally resolved. Keeping your beneficiaries out of probate court, keeping them cared for. The entirety of your estate is cared for from start to finish.

Additional Considerations

Now that you've learned how funding trust with life insurance can help you, you may have some questions. You may be thinking now, doesn't my family need the life insurance immediately? What if I can't afford life insurance premiums? How long will it last? Has coronavirus changed how you get life insurance?

You don't have to fund your trust with the entirety of the life insurance. You decide how much of your life insurance goes to fund the trust. You can split the funding with any source of wealth to ensure it's funding.

Life insurance can be expensive. PolicyScout can help you find the right life insurance for you. Fit your needs and fit your budget. If you can afford a life insurance policy, great. If you can fund the trust without one? Even better. But a trust funded by life insurance is still a good choice. The tax freedom granted keeps you and your family safe from shifting economical needs. What you have today may not be what you have in the unforeseeable future. With life insurance, you have assurance well into the future.

How long will the trust last? Well, that's up to you. We can help you figure out a timeline that works for you and your family. Talk with one of our representatives today to find out how.

Find the right plan for you!Compare insurance carriers in your area. It's 100% free.Get Quotes