Chartered Life Underwriter Practice Exam 2025 - Free CLU Practice Questions and Study Guide

A living trust serves a crucial function in estate planning, particularly in relation to life insurance. By holding life insurance policies within a living trust, the trust becomes the beneficiary of the policy, which allows the benefits to be distributed according to the terms set forth in the trust. This arrangement can help manage and protect the assets for the designated beneficiaries, ensuring that funds are used in a manner consistent with the policyholder's intentions.

When the policyholder passes away, the life insurance proceeds can be directed into the living trust, effectively allowing for the smooth transition of assets without going through probate. This can lead to faster access to funds for beneficiaries and potentially greater privacy regarding the estate's assets. Moreover, a living trust can impose specific conditions on how and when the beneficiaries receive their inheritance, which can be particularly beneficial if minors or individuals who may not be financially savvy are involved.

In contrast, minimizing insurance premiums, acting as a secondary insurance policy, or allowing policy loans are not primary functions of a living trust in the context of life insurance. Those options speak to other aspects of insurance mechanics or policy management but do not pertain to the estate planning and asset management functions that a living trust provides.