Massachusetts Life Producer Practice Exam

What is a valid reason for naming a trust as the beneficiary of a life insurance policy instead of an individual?

1. Trust administration fees would increase policy proceeds

2. Trust can provide management of proceeds

3. Trust ensures immediate payment of proceeds

4. Trust allows for tax exemptions on proceeds

The correct answer is: Trust can provide management of proceeds

Naming a trust as the beneficiary of a life insurance policy allows for the effective management of the policy proceeds. This can be particularly beneficial in several scenarios, such as when the beneficiaries are minors, when there are concerns about the beneficiaries' financial management skills, or when it is important to control how and when the proceeds are distributed following the insured's death. By designating a trust, the policyholder can set specific terms regarding when and how the benefits are distributed, protecting the interests of the beneficiaries and ensuring that the funds are used in a manner that aligns with the policyholder's wishes. Trusts can also provide ongoing asset management, helping to preserve wealth over time and potentially protecting it from creditors or irresponsible spending. In contrast, trust administration fees would not typically increase the policy proceeds; they usually represent an expense incurred when managing a trust. Trusts do not guarantee immediate payment of proceeds; the payout timeline may vary depending on how quickly the trust can be established or administratively processed. Lastly, while there can be tax considerations associated with trusts, naming a trust as a beneficiary doesn't inherently offer tax exemptions on life insurance proceeds in most situations.