Life insurance fund (terms explained)

quick Facts

  • A life insurance credit is a credit financed by your life insurance policy
  • The trustee of your life insurance trust will distribute the assets of the trust according to your wishes
  • There are two main types of life insurance trusts: irrevocable and cancelable

The ability to purchase life insurance credit is one of the many benefits of purchasing life insurance. Life insurance trusts allow the trustee to distribute the life insurance death benefit according to the wishes of the insured person and generally cost about $750 to set up. A life insurance trust is especially useful for parents who want to leave money for their minor children or care for other loved ones. Read on to learn more about how life insurance funds work.

Understanding life insurance funds

Regardless of the type of life insurance, life insurance trusts work the same way. Here is a detailed list of how life insurance trusts work, from purchase and setup to the process of distributing the trust after a life insurance claim is submitted.

The trustee of a life insurance trust can be the life insurance company or a person, such as a family member or an attorney. The beneficiary of life insurance trusts can also be the person you wish so it is up to you who you want to manage your life insurance trust and who you want to receive your trust money. For a full explanation of other common life insurance terms that you may see on your policy, you can visit our Life Insurance Terms and Definitions guide.

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There are two basic types of life insurance funds

There are two different types of life insurance funds that you can choose from. The first type is an irrevocable life insurance credit. This type of life insurance trust cannot be changed or canceled after purchase, which limits the customer’s flexibility in how the life insurance trust can be used. However, the benefit of the Irrevocable Life Insurance Trust is that taxes can be reduced or eliminated entirely on these trusts.

The other type of life insurance trust, the revocable life insurance trust, is more flexible. The policy holder can change the Revocable Life Insurance Trust whenever they want, whether that’s by adding beneficiaries (read our guide, Can You Change a Life Insurance Beneficiary for more information) or adding them to the Life Insurance Trust. Both of these organizations have advantages and disadvantages, so it is important to thoroughly research which one is best for you before purchasing a life insurance policy.

The cost of a life insurance fund

Life insurance funds require an initial setup fee and monthly payments, or the policy will become void. The average cost of credit life insurance is as follows:

If you already have a life insurance policy with a company, it’s cheaper to buy another life insurance policy from the same company, since adding to the average policy is only $42 more per month. Buying an insurance policy from one of the best cheap life insurance companies will also help reduce your monthly costs.

Circumstances in which having credit life insurance makes sense

Not everyone needs to have trust life insurance, but there are a number of situations where it makes sense to have trust life insurance on your policy.

  • You want to make sure your beneficiaries are taken care of after you pass if they can’t handle your assets independently, such as leaving a trust to fund care for underage children or children with special needs.
  • You want to control how your life insurance policy money is handled after you pass.
  • You want your life insurance policy money to be tax-deductible or completely tax-free to reduce the amount lost for taxes.
  • You want to avoid probate, where assets are handled outside of probate court, allowing the trust to be handled out of the public eye (read our guide on Does Life Insurance Pass Through Probate for more information).

If you have a large amount of money that you want to be handled through a credit rather than a less controlled method like life insurance, then a life insurance credit may be right for you.

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Benefits of having credit life insurance

There are many benefits to having credit life insurance. Here are some of the major benefits of having credit life insurance:

As explained earlier, one of the main benefits of a life insurance trust is that you can control how your beneficiaries receive the money. For example, you could give away part of your life insurance fund to a child when they turn 18, another part when they turn 25, and so on. You can read our guide on how to name a minor child as a life insurance beneficiary for more information.

Alternative methods of credit financing

The trust does not have to be funded by your own life insurance policy. Some other ways you can fund your trust are through the following:

  • cash deposits
  • Real estate investments
  • Equity investments

It is up to you to determine the best way to fund your trust. For example, you could just deposit cash into your trust, or you could deposit cash and use some of your stock investments as financing.

Conclusion: Life insurance funds

Life insurance trusts can be a useful tool for those looking for a way to control the release of assets to beneficiaries, reduce the tax burden on their assets, and keep the allocation of funds out of the public records. If a life insurance fund isn’t the right option for you, there are also plenty of other ways to fund the fund, such as cash deposits.

Frequently Asked Questions

What is a trust in life insurance policy?

A trust in a life insurance policy means that the trustee, whether a corporation or an attorney, will handle the distribution of assets according to the wishes of the insured.

What is the disadvantage of credit life insurance?

The disadvantages of a life insurance trust are that it can be expensive to set up, and the details of an irrevocable trust cannot be changed by the insured.

Can I create a life insurance credit if I already have life insurance?

Yes, you can create a life insurance credit if you already have a life insurance policy.

Is it better to put life insurance in a safe?

Trust-owned life insurance can be a good option for life insurance policyholders, as it helps reduce taxes on life insurance death benefits.

Is life insurance part of my estate?

Yes, life insurance is part of the estate, so if you have a policy or trust, you will likely have to file a life insurance tax return unless your policy is tax deductible.

How does credit life insurance affect taxes?

Life insurance trusts can assist in tax-efficient estate planning by reducing the amount of taxes paid.

How do I name a life insurance credit beneficiary?

When creating a life insurance trust, you will be asked about your beneficiaries, whether that be a spouse or child.

Can credit life insurance be amended or cancelled?

A life insurance credit cannot be modified or canceled unless it is a revocable life insurance credit.

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Rachel Brennan

Licensed insurance agent

Rachel Brennan has been in the insurance industry since 2006 when she started working as a licensed insurance representative for 21st Century Insurance, during which time she held her property and casualty license in all 50 states. Several years later, she expanded her expertise in the insurance field, earning a license in health insurance and AD&D insurance as well. I worked for a small health in…

Benjamin Carr

Former state farm insurance agent

Benjamin Carr has worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and advised his clients about their life, health, and property/accident insurance needs. Assessing risk and helping people find the best coverage for their needs is his passion. He appreciates that insurance is designed to protect people, especially in times of…

Former state farm insurance agent

Editorial Tips: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective third party source for all things life insurance. We update our website regularly, and all content is reviewed by life insurance experts.

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