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Irrevocable trust and life insurance

Recently the ampminsure community had a discussion where a member posed a problem before the community member regarding a life insurance policy held in an irrevocable trust. Following is the post made by her.

I am the beneficiary of a life insurance policy. My step mother put the policy into an irrevocable trust. She is mad at me and told her son not to give me the money from the policy after her death. She can’t remove me as a beneficiary, can she legally not give me the money? My share is 1 million dollars.
No doubts members have come forward to her rescue and tried to clear her doubts as much as possible.

The above discussion has made me interested in delving more into the subject of irrevocable trust and life insurance. Now, in this article I’d try to compile my findings regarding irrevocable trust.

Why should I create an irrevocable trust?

The purpose of irrevocable trust is to keep the life insurance benefits outside the estate to avoid paying estate taxes on the death benefit. The life insurance benefits paid to the beneficiaries may not attract income tax but federal estate taxes may get levied on it if the grantor remains the owner of the policy.

However, the major disadvantage for someone to set-up such trust is that once the assets and policies are sifted to the trust the grantor loses his/her control over such property. In a word, an irrevocable trust is irreversible. An irrevocable trust is a separate legal entity and therefore should obtain separate tax identification number for this purpose.

Who can be my trustee?

A trustee needs to be an uninterested party, it neither can be you nor your spouse. And for the same reason not one of the beneficiaries of the trust. If a beneficiary also plays the role of trustee, he/she would enjoy the capacity to cheat the other beneficiaries. The best party to appoint as the trustee would be the bank or your accountant/lawyer.

What if I don’t want to lose control over my assets?

If you want to retain the control over the trust you should consider creating revocable trust/living trust instead. With the revocable trust you would retain the power to manipulate and amend the terms of the trust at any point of time. Even you can fire, dissolve and appoint new trustee whenever situation arises.

The main advantage of creating a living trust is that upon your death the assets with the trust wouldn’t require to be probated. But remember to be careful about choosing the proper trustee for the rust and also appoint a successor trustee to avoid future complications.

Terminally ill? But you may still get life insurance!

Becoming terminally ill isn’t the end of your insurability for the insurers anymore, at least the situation has improved over the time. New medicines have ensured longer life for many critically ill people and the insurance companies too have receognised this fact by extending life coverage to them.

But, what would you qualify for?

Though there is a change in the situation, but you might not still qualify for the standard life insurance policies. What most people with chronic health condition would qualify for is a guaranteed issue policy.

What is guaranteed issue policy?

The guaranteed issue policies are basically no medical underwriting policy, i.e. you neither have to reply to the health related questions nor have to undergo medical tests to qualify for the coverage.
Often guaranteed issue plans are rated higher than the standard life insurance plans but it is a good alternative for people with health issues and seniors who otherwise won’t qualify for life insurance.

These policies, however, have lower death benefits. One may get only upto $50,000 coverage with the guaranteed issue plan. Therefore, it often doesn’t make a good bargain for standard lives.

It might have occurred to you that insurance companies would lose a lot of money by insuring terminally ill people but the situation is little different. The guaranteed issue plans have several restrictions imposed upon it to prevent the insurers from losing money.

Longer waiting period
It has longer waiting period, may be 2 to 3 years, i.e. if the insured die within the first two years of the policy then only the premium paid would be refunded instead of death benefit. Therefore, if you are in good heath you may consider getting policies which would offer immediate death benefit.

Very high premium rate
The premium rate is very high. A policy of $25,000 death benefit then perhaps would cost $2400 in terms of premium each year. So, apparently at the end of the 10th year the premium paid would become equal to the death benefit.

Importance of quotes in buying life insurance policy

The search for life insurance begins with the search for quotes. You want to know how much it would cost to buy the needed protection for your family. But finding the right quotes isn’t as easy as it sounds. You need to know where and how to search for the right solution.

Where to search for life insurance quotes?

• Google over the years have become the answer for all our internet related queries. If you are confident using internet you should search in Google with the term ‘life insurance quotes’.
• There are plenty of sites online which would offer insurance quotes for free. You may have to fill in certain information about yourself in order to obtain a quote. The site would then forward your application to the various agents they have tie-ups with. You would eventually get a call from one or some of those agents. But before providing information on these sites confirm their authenticity. There are many of these sites which operate fraudulently.
• You may visit the sites of the life insurance carriers. Almost all now offer free online quotes for the convenience of the customers. Some would also offer the option to comparing the quotes of their close competitors.

When you may go online, contacting an agent is still a better option since you would then have a personal representative to take care of your insurance needs. An agent wouldn’t work on behalf of the company only but would also help the client to understand his financial needs and plan the coverage accordingly. He would also shop around to help you choose the best deal. Further, the agent can help explaining the policy, its benefits and limitations.

What information is required in life insurance quote form?

The information that you may need to furnish in the online quote form should be general. Any information regarding your bank account and SSN should be excluded. The minimum information that you may need to provide are:

• Your Name
• Age
• Marital Status
• Sex
• No. of dependent in the family
• Occupation
• Annual Income

Further, you may also have to fill out the medical underwriting questionnaire on- height & weight, smoking habit, blood pressure, history of medical issues and the like. Finally, you would have to provide your contact details and the best time to receive a call so that the agents can contact you to finalize the deal.

Beware of phantom quote sites!!

The online quote business is minting gold for the several quote providing sites therefore everyday you would find numbers of companies becoming live on internet. But not all of them are authentic. There are many sites which are simply in the business with the evil intention to scam you. If you find any site that would ask for your personal details such as- social security number in order to offer quotes, it’d be wise to quit immediately.