Massachusetts Life Producer Practice Exam

What could be a disadvantage of naming a trust as the beneficiary of a life insurance policy?

1. It simplifies the transfer of proceeds

2. Trust administration fees could reduce policy proceeds

3. Benefits are available immediately

4. Trustees are often more flexible than individuals

The correct answer is: Trust administration fees could reduce policy proceeds

Naming a trust as the beneficiary of a life insurance policy can introduce complexities, one of which is the potential for trust administration fees. When a trust receives the proceeds from a life insurance policy, those funds must be managed according to the terms of the trust. This management might involve legal fees, accounting fees, or other administrative costs that are paid from the trust assets. As a result, the overall proceeds available to the beneficiaries could be diminished by these expenses. Trust administration can often require more oversight and management than simply passing the benefits directly to an individual beneficiary. Consequently, while a trust can offer protection and control over how the assets are distributed, it also can introduce costs that might reduce the overall benefit received by the designated beneficiaries. This financial factor underscores the importance of considering both the potential advantages and disadvantages of naming a trust as the beneficiary when planning estate matters and ensuring that beneficiaries understand the implications involved.