Putting life insurance in trust – do you need to think about it?
A life insurance policy gives you the peace of mind that your loved ones won’t struggle financially if you die.
However, in some cases, if your policy is not “written in trust”, your loved ones may not be able to get that money as soon as they need to, instead facing infuriating and stressful delays. On top of that, it could also land them with a surprise tax bill.
Here, Telegraph Money explains what writing a life insurance policy in trust involves and whether it’s an option you might need to consider. This guide will cover:
What does writing a policy in trust mean?
“When you write a life policy in trust you pass the ownership of the policy to the trustees, who hold the policy for the benefit of the beneficiaries or potential beneficiaries that you nominate,” said Victoria Francis, head of individual protection propositions at Aviva.
This means that, if the worst happens and your loved ones need to make a claim on your life insurance, the proceeds of the policy will not form part of your estate and will reach your chosen beneficiaries sooner.
The benefits of writing a life insurance policy in trust
If a policy is written in trust it should, in most cases, be paid free of inheritance tax, offering a potential saving of 40pc.
The life insurer can pay the proceeds of the policy to your chosen beneficiaries once they have received the death certificate – they won’t have to wait for probate, which can often take months.
You can control who receives the proceeds of the policy and when they get it.
Creditors won’t be able to make a claim on the money as it won’t be paid into your estate.
Sean McCann, chartered financial planner at NFU Mutual, explained: “There are two main reasons for putting a life insurance policy into trust. The first is to put any potential payout outside your estate which means it won’t be subject to inheritance tax.
“Secondly, using a trust can also mean a speedier payout in the event of a claim, as the family won’t need to wait for probate.”
This means trusts can be a practical option for lots of families. Ian Dyall, head of estate planning at Evelyn Partners said: “If the policy is suitable for a trust then generally most people should use a trust, even if they have no inheritance tax liability. That’s because the money will be available prior to probate being granted, which can be useful for other purposes, such as paying off the deceased’s debts or paying for a funeral.”
The disadvantages
Trusts can be inflexible and it may be difficult to make changes once they have been set up.
Some trusts won’t allow you to change beneficiaries if your circumstances change.
Trusts aren’t always appropriate and may only be available if you are taking advice from a broker or financial adviser.
Trust arrangements may not be available on all life insurance policies.
The main disadvantages of writing policies into trust is the lack of flexibility should you need to make changes further down the line. For this reason, it’s important to be as certain as you can that circumstances are unlikely to change, and that you are unlikely to change your mind about beneficiaries once they have been confirmed.
They’re also not appropriate for all situations. “There are some policies that you would not write in trust. Joint life policies which pay out on the first death of husband and wife generally shouldn’t. That is because the policy is designed to provide for the surviving spouse if one of the spouses dies,” explained Mr Dyall.
“If you put it in trust then neither spouse would be able to benefit from the proceeds on the first spouse’s death.” The same would apply for unmarried or cohabiting couples, too.
This is because to put something into trust and keep it out of your estate, you have to surrender ownership of it – you cannot reserve the right to any benefit from it. As such it doesn’t work for joint life first death policies which could potentially pay out to either of the people taking it out.
If, however, couples take out a single plan each, rather than joint plans, those policies could be written in trust because each of them can benefit from the plan that their partner put into trust.
Who can be a beneficiary?
You can name anyone you like as a beneficiary on your life insurance – whether that’s a spouse or partner, sibling, child, another relative or a friend.
You can even name charities as beneficiaries.
How to write a life insurance policy in trust
Many life insurance companies will provide the paperwork you need to write a life insurance policy in trust, free of charge and you are likely to have a number of options.
An insurance broker or financial adviser will be able to recommend the right arrangement for you, so it may be worth explaining your situation beforehand.
Mr McCann said: “The two most common types of trust that life insurers provide are absolute trusts and discretionary trusts. Under an absolute trust you name one or more people who you would like to benefit and the share of the payout you would like them to have.
“The main advantage of this type of trust is that it provides certainty as to who will benefit. The drawback is that it is inflexible and cannot normally be changed.”
“Under a discretionary trust you can name individuals or groups of people you would like to benefit, such as children and any future grandchildren living at the time of your death.
“The big advantage is that the trustees you appoint can decide who gets a share of the proceeds and when they get it. They can delay a payout or miss out certain beneficiaries if they wish. The benefit of this is that it can adapt to changing family circumstances. You can leave a ‘letter of wishes’ setting out what you would like to happen, but the trustees are not bound to follow it.”
However, Mr Dyall points out that while trusts can generally be arranged free of charge, some life companies will require the customer to take advice.
“This is because there are tax implications that the client needs to be aware of and not all life policies should be put in trust. Policies sold direct to the client without advice tend to be simpler stripped back policies and may not have trusts available,” he said.
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FAQs
Do you pay inheritance tax on life insurance in the UK?
Inheritance tax (IHT) could be payable on a life insurance payout if the policy was not written in trust and the proceeds were paid directly into the policyholder’s estate. However, if the policy is written in trust, it should be paid direct to the beneficiary and no IHT should be payable.
How is life insurance paid out to beneficiaries?
How life insurance is paid depends on whether the policy was written in trust. If the policy was written in trust it will be paid direct to the beneficiaries shortly after the claims paperwork has been received (including the death certificate).
Alternatively, if the policy wasn’t in trust the money will form part of the deceased’s estate and would be paid into an account controlled by the executor of the will. The executor would only be able to distribute the funds after grant of probate.
