How Life Insurance Works With Wills And Trusts


There aren’t many things more important in your financial plan than your life insurance and final will and testament. These financial tools provide you with the peace of mind that both yours and your family’s need will be cared for in the event of death, disability, or terminal illness.

For the vast majority of us, this is a subject that is far too often neglected. Thus, there are millions of Americans walking around without ample protection and coverage should the worst happen. If you’re one of them, you may want to consider reaching out to a trust litigation attorney who can help you get started with setting your affairs in order.

In this article, we will look at how your life insurance policy works with your wills and trusts, and what benefits you can expect to enjoy from naming your trust as the beneficiary of your life insurance policy. Let’s get into it.

Why Life Insurance Is Important

Unfortunately, a reported 43% of the American population does not own a life insurance policy. This is a frightening statistic when you consider the adverse impact sudden death or serious illness could have on the uninsured person’s family, especially if they are the household’s primary earner.

Life insurance is relatively inexpensive for most of us and helps to bring peace of mind to the policyholders, knowing that their kids will be provided for throughout a worst-case scenario. 

Let’s take a look at some other key reasons why a life insurance policy is necessary:

  • Can help to pay off debts such as mortgages, credit cards, and loans that may burden family members left behind
  • Covers the cost of funeral arrangements
  • Can help protect and secure your business?
  • Policies can be used to supplement your retirement if your other investments fall short

How Does Life Insurance Trust Work?

Your life insurance policy will likely be one of the most significant assets in your financial portfolio. When you place your life insurance into trust, you have more control over the way the funds are handed out to the beneficiaries when they receive their inheritance.

In short, trust is a relatively straightforward legal arrangement that lets you leave your assets to anybody that you wish (usually family, friends, or even business partners). 

Once set up, your trust is then managed by one or more trustees who will then remain the beneficiaries of the trust upon the trust holder’s death or a predetermined date.

As for the last will and testament, this document distributes the assets in your estate to the beneficiaries you name in the will. For you to successfully write your life insurance policy into your trust, you must name the trust as the beneficiary.

By doing this, your life insurance payout and the assets listed in the trust should avoid the often lengthy (and potentially costly) probate process, as they already have an assigned beneficiary. 

The Benefits of Writing Life Insurance in Wills And Trusts

Since policy premiums are generally low and the payouts are typically very high, a life insurance policy is a no-brainer for people who want to ensure their families and loved ones are cared for when they have gone. 

Let’s take a look at some of the benefits of writing life insurance into wills and trusts:

  • It avoids probate, which avoids the legal fees and unwanted delays associated with the process
  • Helps to reduce estate taxes by excluding life insurance proceeds from your estate
  • Allows you to select one or more trustees who will be the beneficiaries of your life insurance policy
  • Provides immediate cash which can be used for other expenses and necessary payments, such as funeral costs, estate taxes, debts, legal fees, and income taxes)

Your life insurance does not need to have the same beneficiary as your trust or your will (the beneficiary determined on the life insurance will be the person who receives the payout). This is why it is important to name the trust as the sole beneficiary of the life insurance. 

The reason being is if the person that is named on the life insurance (spouse or partner) dies or is incapacitated at the time of your death, the court can take over the case and forcibly enter the life insurance policy and payout into probate (court supervision). 

This court interference is often costly, time-consuming, and can be unsettling for close family members, especially during a time that is reserved for grieving and focusing on things such as funeral arrangements.

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