Life Cover – Written In Trust
For a number of reasons, writing your life cover in trust is the best thing you can do for your beneficiaries. Setting up a trust ensures that money is passed directly to your beneficiaries, keeping it outside of your estate and without reference to your will or the taxman. There will be no need to apply for probate so the process of getting the money to your beneficiaries will be significantly decreased, by on average about six months.
In addition, setting up a policy in Trust will ensure that the money is not subject to Inheritance Tax.
Life Cover Written In Trust – FAQs:
A Trust is a way of putting something valuable (an asset) aside to benefit others – in this case, your life insurance policy. A Trust lets you, the policyholder; decide where your money will go in the event of your death, that is, the beneficiaries and how much each will get.
- The settlor – they create the trust and initially own the policy (you, if it’s your policy).
- The trustees (of which the settlor may be one) – look after the trust’s legal requirements. They’re also considered the legal owners of the policy.
- The beneficiaries – those who benefit from the life insurance payment when a claim is made.
When you die, the proceeds from a life insurance policy will normally be paid into your estate free of tax. Unfortunately, the insurer cannot hand over the money until legal matters concerning your estate have been resolved, for example, probate has been granted. The courts have to give permission for assets in your estate to be given to your beneficiaries. This takes time, and if you die before making a will it can take even longer. To make sure that your dependants get the money as quickly as possible, you can arrange for the policy to be ‘written in trust’. The Trustees don’t have to wait for the courts, so your life insurance payment can be made as soon as possible.
If your life insurance isn’t under trust it automatically becomes part of your estate, which could increase the chances of inheritance tax being due. Putting your policy under trust may mean that inheritance tax can be avoided.
Placing your policy in trust means the proceeds will go to the people you intended. For example, if you owed money when you died, a trust could mean the money paid out under policy would go to your loved ones not your creditors.
If you left behind children under 18 when you died, trustees could use the trust to support your children. Once your children have turned 18 they can have full access to the money in the trust.
The benefit from the Life Insurance will form part of the deceased’s estate. Your dependents, the people in need of the money would probably have to apply for probate, which incurs costs on its own and can often take around six months to complete.
If the total value of the estate is over the inheritance tax barrier (which was £325,000 in 2020/2021) then the amount over the barrier would be taxed at 40% (2008/2009). Please note: Inheritance tax is exempt for husband, wife and civil partners domiciled in the UK.
Inheritance tax (IHT) receipts grew by £160 million to a total of £5.4 billion in the year to March 2019.
- The name of one or two trustees, in addition to yourself.
- Names of the beneficiaries (there must be at least one).
- The percentage of the life insurance payment you’d like each beneficiary to receive (shares must add up to 100%).
There are no benefits to writing a standalone Critical Illness Cover policy in trust as the benefits are payable to yourself; there are however benefits to writing combined Life and Critical Illness policies in trust. The benefits of placing a combined Life and Critical Illness policy in trust are exactly the same as it would be for Life Insurance, however if you needed to claim on the Critical Illness Cover side of the policy, you would receive the benefits instead of your nominated beneficiaries.
Generally, any policy can be written in trust, but some shouldn’t be. For example, if the insurance has been arranged to cover your mortgage and not provide money for your dependants.
Most insurers give you the option of writing a policy in trust at no extra charge and have standard forms to cover common situations. Solicitors can also help with trust-writing (if your affairs are more complicated or if your insurer does not provide a trust-writing service) but they will charge a fee.
Both beneficiaries and trustees can be changed with a flexible trust.
An alternative to writing a policy in trust is to buy a policy on a ‘life-of-another’ basis. In this situation, your husband, wife or partner takes out life insurance based on your life. If the other policyholder dies within the policy term the policy pays out to the surviving partner as owner of the policy. Note that you cannot take out a life-of-another policy on just anybody’s life: you must stand to lose financially if the person on whose life you took out the policy were to die – in the jargon, you must have an ‘insurable interest’ in the other person. You are assumed to have an unlimited insurable interest in your own life and that of your spouse. When it comes to other people, your insurable interest is limited to the amount you would lose if they died.