Insurance Trust

AAA

DEFINITION of 'Insurance Trust'

An irrevocable trust set up with a life insurance policy as the asset, allowing the grantor of the policy to exempt asset away from his or her taxable estate.

Once the life insurance policy is placed in the trust, the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.

The insurance trust, or irrevocable life insurance trust (ILIT), is often used to set aside cash proceeds that can be used to pay estate taxes, as the life insurance policy should be exempt from the taxable estate of the decedent.

INVESTOPEDIA EXPLAINS 'Insurance Trust'

One catch on the insurance trust is that the life insurance policy must be transferred to the trust at least three years before the death of the insured. To get around this rule, a new policy can be taken out with a spouse as owner, then placed in the trust.

As an irrevocable trust, changes can only be made by beneficiaries; the owner gives up all control to the trustee. If the size of the taxable estate is below the maximum exclusion figure, it is generally not necessary to set up an insurance trust; in this case the life insurance will be included in the decedent's taxable estate.

RELATED TERMS
  1. Bypass Trust

    An estate-planning device used to pass down assets after death ...
  2. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
  3. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  4. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  5. Trustee

    A person or firm that holds or administers property or assets ...
  6. Pour-Over Will

    A will established by an individual who has already taken the ...
RELATED FAQS
  1. When is it a good idea to use an irrevocable life insurance trust?

    The irrevocable life insurance trust or "ILIT" is a trust that cannot be rescinded, amended or modified in any way after ... Read Full Answer >>
  2. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  3. What is the difference between a revocable trust and a living trust?

    A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed ... Read Full Answer >>
  4. What level of reserve ratios is typical for an insurance company to protect against ...

    In the United States, and most developed nations, regulators impose required statutory capital reserve ratios on insurance ... Read Full Answer >>
  5. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
  6. What are the main factors that impact share prices in the insurance sector?

    The main factors that impact share prices in the insurance sector are interest rates, earnings and actuarial risk. In the ... Read Full Answer >>
Related Articles
  1. Options & Futures

    How To Avoid Taxation On Life Insurance Proceeds

    Decrease the value of your taxable estate and prevent the tax man from getting you one last time.
  2. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  3. Personal Finance

    Get Ready For The Estate Tax Phase-Out

    Changes to federal legislation will affect how your assets are treated once you're gone - be prepared.
  4. Insurance

    Extreme Mortality Bonds: High Risk and High Reward

    Insurance companies issue extreme mortality bonds to cover their losses in the event of a large-scale disaster. Here's a look into these high-risk, high-reward bonds.
  5. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  6. Investing Basics

    Top 3 Ways to Manage Lump-Sum Windfalls

    Have you just had a load of money drop into your lap? If so, several enviable options are available to you. Which one is the best choice?
  7. Professionals

    How Advisors Can Tackle the Big Wealth Transfer

    The massive wealth transfer from Baby Boomers to their heirs presents opportunity and challenges for advisors. Here's how they can tackle the challenges.
  8. Professionals

    How Advisors Can Help New Doctors Conquer Debt

    Doctors have high potential for building long-lasting wealth, but they need advice on the best way to pay off student loan debt first.
  9. Professionals

    Advisors: Get Those Referrals! (Here's How)

    If you're not talking to your clients about referring you to friends, you should be.
  10. Insurance

    The Best Way to Insure Your Jewelry

    What you need to know to keep those baubles, bangles and beads safe.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!