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Should you name a trust as your life insurance beneficiary?
Naming a beneficiary on your life insurance policy allows you to have peace of mind knowing your benefits are distributed according to your wishes. One alternative to naming a particular person—like a spouse or relative—as a beneficiary is setting up a trust and assigning that to be your beneficiary.
While this option isn’t for everyone, it can be the right choice for people who want more control over how their benefits are distributed.
For example, if you have children who are minors, naming a trust as your life insurance beneficiary allows you to rest assured that your children will be the recipients in the event of your death. In this article, we’ll weigh the pros and cons of this process to help you determine if it makes sense to name a trust as your life insurance beneficiary.
The Pros of Naming a Trust as a Beneficiary
When you’re deciding who to name as the beneficiary of your life insurance policy, it’s important to review your options, along with their advantages and disadvantages. Here are some of the pros of naming a trust as a beneficiary:
- Avoiding the Probate Process: By naming a trust as your beneficiary, you can avoid the probate process. This is the process in which a court decides how assets in your estate will be distributed based on the validity of your will and your beneficiaries receive portions according to your wishes. However, a probate can be expensive and take a long time to complete, delaying the time it takes for your loved ones to receive the financial support you set aside for them. Probates may also involve having a portion of your funds removed to pay off outstanding debts and taxes, including legal fees involved with resolving the probate.
- Controlling the Pay Out of Your Death Benefits: Naming a trust as your beneficiary also allows you to have more control over the money paid out of your death benefits. For example, if your kids are minors you can have a trust pay out a certain amount to them to handle general expenses, and allocate particular funds for them to receive when they turn 18.
The Cons of Naming a Trust as a Beneficiary
While there are definitely perks to naming a trust as your life insurance beneficiary, here are some of the drawbacks of this option:
- Involves Significant Estate Planning: Naming a trust as your beneficiary requires more estate planning than naming a specific person, like your spouse or child. This is because you’ll need a will before you can set up a trust, which may require more time and effort if you don’t already have one written.
- Requires Additional Funds: While you can name an individual as a beneficiary for free, it costs money to create a living trust. These costs may cover things like legal fees, setting up deeds and transferring document ownership.
How to Name a Trust as a Beneficiary
Once you’ve set up a trust, the process of naming it as beneficiary is typically the same as designating a person. There are multiple ways to name a beneficiary and options vary by insurance provider. You’re usually able to name a beneficiary either online, over the phone or on a physical form sent via the mail.
You also have the option to name the trust as a secondary beneficiary with a relative or loved one as the primary beneficiary. For example, if you name your spouse as the primary beneficiary and they pass away, then the trust will act as a backup beneficiary to ensure your benefits are paid out appropriately.
SelectQuote Can Answer Your Questions About What it Means to Name a Trust as a Life Insurance Beneficiary
Naming a beneficiary can be a complicated decision, and even more so if you’re considering using a trust. With over 35+ years of industry experience, SelectQuote can guide you through important decisions about life insurance. We can answer any questions you have about beneficiaries so you have the confidence and peace of mind you need when making decisions about your policy.
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