Only 6% of people put their life insurance in trust. Yet doing so could be advantageous. We list the potential benefits, such as avoiding going over the inheritance-tax threshold and bypassing probate.
When it comes to planning your family’s financial future, it makes good sense to take all steps possible to protect their standard of living.
Arranging your life insurance in the right way - to give your loved ones the maximum possible benefit - is an important consideration.
One option to consider when taking out life insurance is putting the policy into a trust.
And yet according to insurer Aegon, only 6% of life-insurance policies in the UK are set up in this way.
This is surprising as, although this process isn’t necessarily suitable for all people, it can be advantageous in the case of many.
Do bear in mind that if you want to discuss the specific advantages of putting your life insurance policy into trust, you’ll need to speak to an independent legal advisor.
What is a trust?
A trust allows you to set aside an asset to benefit a specified person or people (the beneficiaries).
The asset is managed by a trustee or trustees until such time as the beneficiary is intended to benefit.
So, for example, your spouse may look after property on behalf of your children until they reach a responsible age.
Life insurance policies are such an asset, and putting a policy into a trust can affect what happens to the payout from a policy in the event of your death.
Note: In industry jargon, putting a life insurance policy into a trust is known as “writing life insurance in trust” or a policy is “written in trust".
The principal advantages to putting a life insurance policy into trust are as follows:
Trusts can help sidestep inheritance tax
Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and may therefore be subject to inheritance tax.
The threshold per individual for inheritance tax in the UK is £325,000. Tax is payable at 40% on any part of an estate above this level.
By writing a life-insurance policy in trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when inheritance tax is calculated.
This means the value of your estate may not move above the threshold, depending on your circumstances.
You don't need probate to be granted in order for the policy to pay out
Writing a policy in trust also means payment to your beneficiaries will probably be quicker, as the money will not go through probate.
This is a legal process which confirms an executor’s authority to deal with your possessions.
So, for example, if you leave everything to your spouse in your will, then your spouse will have to get probate granted before they can distribute your money, property and so on.
This process can take a long time, even when there is a will. In cases of intestacy (where there is no will), it can drag on for a lot longer.
However, if the life insurance policy is put into trust, then it can potentially pay out long before probate is granted, as the insurance provider will just require a death certificate before paying out.
Obviously it’s better for a family to get an insurance payment as soon as possible, as the period following a death is stressful enough without being concerned about where the money’s coming from.
You could get greater control over your policy
Writing life insurance in trust allows you to specify how you want the proceeds to be paid out. For example, trustees can be appointed to oversee money for the benefit of children under 18.
In addition, setting up a trust means that the payout will go to the people you intend it to.
Does it cost extra?
No. Your insurance provider should be able to provide you with this option for free when taking out the policy.
Some existing life policies can also be transferred into trust. Although if you want to write a life insurance policy in trust, we suggest you speak to an independent legal advisor first.