Can Trusts be Made Life Insurance Beneficiaries?

Life is fickle. Death can come knocking at the most unpredictable of times and in the most unforeseen of ways. Who would have thought that Kobe Bryant would meet his end the way he did, at just 41?

But such is life. And that is where trusts are often considered a suitable option to be made life insurance beneficiaries, especially when you have young children.

Below we explore the nuances of making trusts as life insurance beneficiaries.

Image Courtesy – Barry-McKenna

Firstly, to answer the question right up front, YES, trusts can be made life insurance beneficiaries. And, doing so comes with distinct advantages which we explore below.

Inability to Grant Insurance Proceeds to Minors

In the unfortunate instance of parents (or a parent) dying young when children are still minors, insurance companies often do not grant insurance proceeds until a guardian is appointed by the court. This process can take time which can prove to be a major setback in cases where prompt receipt of those funds is crucial.

Now, appointing trusts ensures that life insurance proceeds, in case described above, are suitably handed out to minors in such scenarios. For instance, while a portion could be handed out immediately, the rest could be given when they attain certain ages, say when they turn 18, 21, or 25, and so on.

Choosing between Revocable and Irrevocable Trusts

Trusts can be either revocable or irrevocable. In most instances, families tend to opt for revocable trusts since they are flexible (true to their name!) and can be modified as per a change in situation or the mere passage of time. Therefore, when it comes to making a choice between the two as a life insurance beneficiary, opting for a revocable trust would be recommended.

Appropriate Cash Flow and Optimum Funds Allocation

One of the biggest advantages to appointing trusts as life insurance beneficiaries is the optimum way in which they allocate funds to the next of kin, particularly focusing on appropriate cash flow. After all, in case of a sudden tragedy, let’s say the death of both parents, you do not want young children to be showered with funds which they are unlikely to (or be able to) use responsibly. A prudent intermediary in all such scenarios is quintessential; trusts prove to be exactly that.

Conclusion

Trusts CAN definitely be made life insurance beneficiaries. Moreover, as pointed out above, doing so comes with distinct advantages.