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How does a life insurance trust work?

On Behalf of | Oct 30, 2023 | Estate Planning

Taking out a life insurance policy is one way to provide for your loved ones after you die. However, you may worry about dying before your children are old enough to handle the insurance payout. Creating a life insurance trust could be the answer to this dilemma.

A life insurance trust is a legal arrangement that owns a life insurance policy on behalf of the trust beneficiaries. You can establish this kind of trust in two different ways.

Revocable life insurance trust

Making your life insurance trust revocable allows you to alter or terminate it at any time. The assets are still part of your estate, so any insurance payouts at the time of your death will generally be subject to estate taxes.

A major benefit of a revocable trust is flexibility. You retain control over the policy and can make changes to beneficiaries or trustees. This allows you to amend the trust if circumstances change.

Irrevocable life insurance trust

With an irrevocable trust, you permanently transfer ownership of your life insurance policy to the trust. This removes the policy proceeds from your estate. However, there is almost no way to change or dissolve the trust without the consent of the beneficiaries.

By making your trust irrevocable, you can avoid some taxes. The insurance payout will not be subject to estate taxes after your death. This can result in significant tax savings if you own a lot of wealth.

Payout control

Putting your life insurance into a trust allows you to control how to distribute the payout to beneficiaries. Even if your children are adults, you might not want them to spend all the money at once, particularly if they struggle with debt or addiction. You can specify in your trust documents how much your beneficiaries receive and what they can spend the insurance money on.


A 2023 Forbes survey found that three out of every four American adults possess some type of life insurance, so chances are that you have an insurance policy you could place into a trust. Ultimately, the benefits of using a life insurance trust depend on your financial situation and estate planning goals.


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