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The one simple way to ensure your life insurance goes to who you want, quickly

The one simple way to ensure your life insurance goes to who you want, quickly

Jul 14, 2023

 

When you decide to put life insurance in place, you do it because you want to make sure your loved ones will receive valuable financial support when you’re no longer around.

However, if you don’t arrange your cover carefully, it can leave your beneficiaries with a headache, either because of the time taken to receive the funds or because it might lead to an unexpected tax bill.

If you want to ensure that your loved ones receive your life insurance payout quickly and that the money goes to your chosen beneficiaries, writing your policy in trust could help.

In this guide, you’ll read about:

  • What a trust is and the different types of trust
  • How a trust can help you to ensure that the right people receive the proceeds of your life insurance payout
  • How putting your policy in trust can help ensure the money is paid quickly on your death
  • How a trust can help your loved ones avoid an Inheritance Tax bill.

As life insurance experts, we can help you to put your policy in trust when you take out cover. Contact us to find out more, or get a life insurance quote online now.

Trusts are a legal agreement that lets you choose beneficiaries

In simple terms, a trust is a legal agreement which lets you (the “settlor”) choose who certain assets are passed to on your death.

In a trust, the assets are held and managed by one person or people – these are known as the trustee(s). The person who benefits from the assets is the beneficiary.

A trustee can be anyone. You would normally add yourself as a trustee, and other trustees could be family members, friends, or a solicitor. They must be over the age of 18.

You can either place your life insurance policy in trust when you take it out, or later down the line.

There are two main types of trusts.

  • In a bare trust, you put the assets in trust and, when you die, the money is shared out according to your wishes. In England and Wales, this kicks in when the beneficiaries reach the age of 18 (or age 16 in Scotland).
  • A discretionary trust can be more flexible. Here, you have more power, as you can decide how much each beneficiary gets and also over what period.

There are also flexible trusts where you must name at least one default beneficiary, who will receive the full payout unless the trustees choose to give funds to additional “discretionary” beneficiaries.

You can name the beneficiaries (who you’d like your life insurance payout to go to)

When you put your life insurance in trust, you can decide to split the payout between as many beneficiaries as you like.

It’s important to note that you cannot change your named beneficiaries once a bare trust has been set up – unless you rewrite the entire trust, which could disrupt your policy benefits if not done right.

This is the biggest risk of a trust as, if you later fall out with your beneficiary, it can be difficult to change. Note that this isn’t an issue for discretionary trust, only for trusts where you have to name the beneficiary.

A trust can help you if you aren’t married to your partner

If you are not married, putting your life insurance policy in trust and listing your partner as a beneficiary can help you to ensure that your estate passes to them.

Setting up a trust is especially important if you are a cohabiting couple with children. This is because you don’t have the same rights under the law as a married couple.

Without a trust, your life insurance payout may pass directly to your children, and not to your partner.

A trust can help to ensure the policy proceeds are paid more quickly

One of the main benefits of putting your life insurance policy in trust is that you don’t have to wait for the probate process to conclude before the policy will pay out. In most cases, a trustee just needs the death certificate.

This is especially important considering that This is Money reports that probate applications are taking up to six months to be processed – especially if you submit a paper form rather than applying online.

If you have to wait for probate there could be a lengthy delay before the life insurance proceeds are paid, leaving your loved ones in potential financial hardship.

A trust can help your loves ones avoid an unexpected Inheritance Tax bill

Another key benefit of placing your life insurance in trust is that it ensures the payout is not counted as part of your estate when you die. Instead, the assets in the trust become the property of the trustees, and no longer “yours” – meaning there’s no Inheritance Tax (IHT) charge.

As long as a trust is set up seven years before your death, the entire life insurance payout will be exempt from IHT.

This is particularly important if the sum assured under your policy is substantial. Considering that the threshold for paying IHT stands at £325,000 in the 2023/24 tax year (or £500,000 if you leave your home to a child or grandchild), the value of a life insurance payout added to your other assets could easily leave your estate liable for the tax.

Bear in mind that, if you change any of your named beneficiaries less than seven years before you die, there could still be an IHT charge.

Some insurers offer alternatives to trusts

While a trust is a simple and effective way to pass on life insurance proceeds, some insurers do offer useful alternatives.

For example, Royal London offers something called “beneficiary nomination” in situations that are more straightforward and where it’s clear who the settlor wants to benefit from their estate. In these cases, they will automatically pay any benefit on death to your nominated beneficiary without the need for probate or the completion of a trust form.

Another perk of this approach is that, once you have nominated a beneficiary, you can also change it to someone else – a big difference from a bare trust.

However, you can’t remove all beneficiaries. This is because, to be effective, it must not be possible for the plan to come back into your estate for you to benefit from it; someone else must receive the payout.

We can help you to write your life insurance policy in trust

As you have read, a trust is a great way for you to ensure that your life insurance proceeds pass to the right person or people quickly. It can also ensure your loved ones don’t face an unexpected IHT bill.

As life insurance experts, we can scour the market for you. We’ll compare the costs from dozens of the UK’s leading insurers, so you benefit from the peace of mind you want at the best possible price.

As part of the underwriting process, we can also help you to put your policy in trust, so you know your beneficiaries will receive the payout were you to pass away within the term of your policy.

To find out how we can help you, get in touch with one of our experts today, or get a life insurance quote online in just a couple of minutes.

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