Life insurance salesmen are continually making consumers aware of how important life insurance is to their families. No one wants to leave their family unprotected or leave them to fend for themselves should something happen to the primary wage earner. But is a general life insurance policy enough or should you create a life insurance trust fund?

Avoiding Estate Taxes

When the owner of a life insurance policy passes on, the money left to his family can be subject to estate taxes. Estate taxes are very costly. But this can be avoided if the money goes into a life insurance trust fund. You can use money from the trust to pay for your life insurance policy and the heirs receive the complete amount upon the grantor’s death. If you have a large estate this could mean quite a savings.

There Are Drawbacks

While life insurance trust funds can be a good choice there are factors the consumer needs to be aware of before putting one in place. So make sure you thoroughly understand these drawbacks before you make a decision.

Things You Cannot Do

One of the things you cannot do in an irrevocable life insurance trust is change your beneficiaries. So, if your family situation changes, you get divorced or decide to disown your only child who is listed as the heir, you are stuck with your decision.

Life insurance policies, in general, can be borrowed against. Not so for those set up as trust funds. You cannot borrow against them at anytime.

You cannot transfer an existing life insurance policy to a trust fund. Not if you are trying to avoid estate taxes. There is a certain amount of time you have when transferring policies or the grantor is still considered the owner and the policy would be subject to estate taxes.

Premium Payments

The amount you put into premium payments may not make it worth avoiding the estate tax. The creator of the trust needs to consult with a lawyer in this area. There are ways of making financial gifts to the trust fund that can avoid taxation.

Finding a Trustee

The grantor cannot be the trustee in this type of trust fund. If that was the case he would still be the owner of the trust fund and would make the whole purpose of the trust fund useless.

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