Insurance Trust: Leaving a Legacy

Estate planning is a term in the financial planning and insurance world whereby you plan how your assets and properties will be distributed after your passing. There are several methods to plan your estate, including through insurance, wills and trusts. 

This time, we’re going to learn more about insurance trusts and what it means to have one. An insurance trust is not a complex concept. Therefore, we will be examining the benefits of trust insurance and the reason why you should consider it. 

What is Insurance Trust?

An insurance trust is where the benefits of your life insurance are placed legally into the hands of trustees. The trustee then has the responsibility to manage, hold and distribute the benefits of your life insurance to the beneficiaries of that life insurance. 

In addition to life insurance, other types of insurance can also be put into trust, such as medical insurance policies. 

These trustees can be an individual or a company appointed by the Settlor ( the creator of the trust and owner of the assets). Examples of individual trustees include trusted family members, friends or a member of the legal profession. Companies can include legal firms, will writers and other professional entities. 

An insurance trust is irrevocable and non-amendable, which means that it cannot be changed after your death by anyone and the terms of the trust have to be respected. 

Insurance policies have been put in trust for various reasons, which we will look into in detail later. However, it is usually created for beneficiaries who are minors, disabled, ill or cannot care for themselves in one way or another. 

Can I Create an Insurance Trust for Myself?

In certain cases, you can also create an insurance trust to benefit yourself. For example, you have a critical illness policy that promises a large payout in the case that you fall into a coma, or suffer a stroke that leaves you incapacitated or bedridden. 

Due to the severity of your illness, you cannot move around and administer the payouts from your insurance. It is very challenging. Perhaps you don’t have a trusted family member who can administer the funds either. 

Therefore, according to the trust insurance terms that you have created, somebody else or a  professional and independent organization will be disbursing the money to provide care and adequate medical attention for you. This will ensure that your policy benefits are administered in a fair manner. 

Why should I create an Insurance Trust?

An insurance trust is one way of creating greater assurance and security for your loved ones and yourself. It ensures that the money is spent the way you wish it to be. Here are some of the reasons why you should place your insurance under trust. 

1. Providing for underaged beneficiaries

In the event that you pass away with underaged loved ones, you can protect their money and disburse it for their care until they reach adulthood. Alternatively, a trustee can also hold the insurance benefits until your underaged beneficiary reaches a certain age where they can manage their own finances. 

Some settlors of trust prefer to only disburse this insurance payout to their underaged beneficiaries directly. Therefore, they place it in trust so that other family members will not take advantage of the money and that the full sum will only be enjoyed by these youngsters alone. 

2. Protection against unhealthy spending

No one knows your loved ones better than yourself. If you would like to have a structure protecting your loved ones from spending all your insurance payouts at once, then you can place your insurance in the hands of trustees. 

Research has shown that an overwhelming majority of those who come into a sudden windfall of money, deplete that amount within a matter of a few years due to poor management. 

With a trustee managing the money, you can ensure that the payout will be able to sustain your loved ones for a longer time, and can be used to generate an income for them in a sustainable manner. 

3. Provide finances almost immediately

Unlike other assets, the payouts from life insurance can be enjoyed almost immediately by the beneficiaries, even if it is placed with a trustee. It does not need a will for it to be disbursed and doesn’t require a few months for the Grant of Probate to be issued first. 

Therefore, your beneficiaries can enjoy financial security under the terms that you’ve determined while waiting for the transfer and release of your other assets. 

Additionally, an insurance trust is not subject to Faraid law, which is the law of Islamic inheritance. Therefore, if you’re a Muslim, creating an insurance trust is one way of providing for your loved ones that may not receive an adequate amount of your assets to support them under Faraid law. 

4. Set specific terms for how the money is used

With a non-trust life insurance payout, the money will be disbursed to your beneficiary in a lump sum after your passing. How the money is used will be fully up to your beneficiary.

This may not sit well with certain people who want to have more control on how and when the money is used. For example, if you want your life insurance payout to be used for your children’s education only and nothing else. 

For  non-trust insurance, your beneficiary, who might be your spouse, can use it to buy a new home or car. There are no legal terms or conditions binding them. However, with a trust insurance, your trustee can disburse the funds solely to pay for your children’s educational fees and nothing else. 

Trust Insurance for More Control

From a legal standpoint, there are several types of insurance trust you can choose from. They usually differ in the amount of power the trustees have over how your money is disbursed and used. 

These days, many insurance policy providers have insurance trusts as an option for many policies, especially life insurance, critical illness and more. Do speak with your insurance consultant regarding whether an insurance trust is the answer to your needs. 

Note: All images from xFrame.io