Do you need a life insurance trust?

The following column was published in The News Star on Saturday, November 1, 2014.

Question: I have decided to buy a pretty large life insurance policy on myself so that if something happens to me my wife can keep raising the kids. She would have to forgo much of her career to raise our kids alone, so it wouldn’t be fair for her to have to go back to work later in life just because I died early. So I’m good with all that, but I am not interested in some dude coming along after me and sweet-talking my wife out of the money I leave for my her and my kids. How to I keep that from happening?

Answer: The way I usually hear this expressed is, “I trust my wife completely. It’s the guy after me I’m worried about.”

If you are planning to buy a life insurance policy large enough to replace your income, it’s likely you talking about a $1,000,000 policy or greater. I agree that’s too much money to leave to chance.

When someone takes out a life insurance policy on themselves, they must name a beneficiary. The beneficiary is the person (or entity) that would receive the life insurance proceeds in the event of your death during the time the policy is in force. And life insurance proceeds usually are paid income tax free to that beneficiary.

So, imagine you took out a $1,000,000 life insurance policy on yourself. Suppose the day after you pick up the policy and pay for it (thereby putting the policy “in force”), you die in a tragic accident (any accident in which I die will be tragic). One moment you are alive and kicking. The next, you are a life insurance company claims statistic.

Soon after, your beneficiary (now your widow) contacts the life insurance company, notifying them of your demise. What do you want to happen?

They could send her a check for $1,000,000. She would then have a lot of decisions to make. Does she pay off the home mortgage? Put the money in the bank? Endow a scholarship in the name of your hunting club? Buy a new car? Take a vacation?

If that doesn’t sound like a situation that would end well, don’t worry. Delivering a lump sum payment of $1,000,000 to your wife is not your only option.

When you buy a life insurance policy, you can designate any one of several options of what to do with the money in the event of your death, the lump sum payout being just one option. The others include paying your beneficiary interest only (yipes, that would be nearly zero these days). Or, you could pay out the benefits over a specific number of years. For example, you could pay out $100,000 per year for ten years.

Another option for you to consider is a life insurance trust. This trust could actually be written into your will, so it would not even come into existence unless you died. You would then name the trust as beneficiary of your life insurance policy. In the event of your death, assuming you die while the policy is in force, the death benefits would pay to the trust.

The whole idea of the trust would be for it to pay your widow a regular income (sufficient to live on), while keeping the principle intact. You can have the trust written in such a way as to protect those you love and keep those with less than virtuous motives from getting their hands on money meant for your family.

Talk to an experienced agent about the policy and to an attorney experienced in estate planning about the trust in your will.

Don’t leave it to chance.

Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.