If you buy life insurance on yourself, then you will have to realize that you won’t see the policy’s payout (the death benefit) during your lifetime. It is your death that will trigger this policy benefit, after all.
Therefore, when you enroll in your coverage you will have to designate a beneficiary for your policy’s death benefit. Most people name their beneficiary as a spouse, adult child or other trusted party.
However, some people don’t realize that once a beneficiary receives a death benefit payout, they have free discretion to use the benefit as they see fit. If you want the money within your death benefit to go to a specific purpose, then you might need to take the extra precaution of placing the death benefit within a trust. Here’s how it works.
What is a Trust?
A trust fund is a bank account that contains specific rules on how the money within the account is to be distributed or spent. Therefore, when someone wants to use the money within a trust, they will usually have to contact the trustee, who is the person overseeing the trust, to request a release of payments.
Therefore, from a life insurance perspective, by directing the money from your death benefit into a trust, you can put restrictions on its use. Even though you are not around to oversee the use of the money, the instructions you leave on the trust will be held to be your final word, legally, on the subject.
Why use a Trust?
If you choose to use a trust option for your life insurance death benefit, then you make the trust itself the policy beneficiary, and place a trustee in charge of the account.
Most people buy life insurance with certain objectives in mind. By placing the money in the account, you can ensure that the money goes where you want it to go.
For example, many young parents buy a life insurance policy to cover a child’s education expenses in the event of their death. Minors cannot be beneficiaries of life insurance policies. Therefore, if you want this money to pay distributions for the child’s education costs, you can establish a trust with specific rules on where the money is to go. When the child’s educational costs arise, the trustee can authorize the distribution of the funds to the child.
In many cases, you can make a trust either revocable or irrevocable. Revocable trusts are often a bit more malleable because you can terminate them even after you have established them. Therefore, you can change the use of your policy’s death benefit as your life insurance needs change.
Get A Quote