Insurance Trusts

The Differences Between Insurance Trusts and Insurance Claims Trusts

Firstly, an insurance trust refers to a trust set up by the policyholder during one's lifetime, transferring ownership of his/her life insurance policy to the designated trustee for custody and management. This way, if the policyholder unfortunately passes away, the trustee can distribute the insurance payouts to the pre-assigned beneficiaries in accordance with the trust deed.

Therefore, the focus of an insurance trust lies in the custody and administration of the policy itself. It detaches the policy from the policyholder's assets, avoiding estate duties; at the same time, it also prevents disputes over inheritance that may arise. These are the main reasons why many people consider setting up insurance trusts.

On the other hand, an insurance claims trust is a form of trust set up only after the occurrence of an insurable event, i.e. the death of the policyholder. At this time, the insurance company will pay the death benefits directly to this newly established insurance proceeds trust, and the trustee manages and distributes the funds to the beneficiaries following the terms of the trust.

For example, a married couple can designate USD 1 million of death benefits to set up an insurance claims trust, which states that after the husband's death, a specified amount shall be distributed to the wife as beneficiary each year for 10 years. This way, even if the husband unfortunately dies early, these insurance payouts can still provide the wife with financial resources in the years ahead.

Therefore, the emphasis of an insurance claims trust is on arranging the utilization of the death benefits rather than simply paying it out. The operation of the trust allows for more flexibility in the application of the insurance funds.

In summary, an insurance trust focuses on custody and administration of policies, and is a predefined long-term trust; while an insurance proceeds trust concentrates on managing the distribution and utilization of death benefits after the occurrence of the insurance incident. The two serve different purposes, and individuals can decide which arrangement to adopt according to personal financial needs and estate planning objectives.

Banking and savings