They can be established so that if the policyholder, who is also the settlor, dies, the life insurance pay out is distributed via their trust.
However, if they suffer a critical illness and live, then they will retain the benefit from the critical illness policy.
The first trust would contain the terminal illness or death benefits held by the trustees for beneficiaries other than the settlor. An exception to this rule is if the policy is a joint life, first death policy, where a joint settlor may benefit from the gifted benefits if the joint settlors elected for the survivorship option to apply when the trust was established, and the surviving settlor survives by 30 days following the first death.
These benefits are known as the gifted benefits.
The second trust would deal with any income protection benefits and any benefits paid in the event of critical illness or total permanent disability. These would be held for the absolute benefit of the settlor.
These benefits are known as retained benefits.
The settlor can choose to have the retained (critical illness) benefits treated as gifted benefits when the trust is set up, but in so doing they give up all rights of access to these benefits in the future.