Life cover is something that gives you real peace of mind when you have it – but it’s something you hope you never have to use.
It’s designed to ensure your loved ones receive financial support when you’re no longer around. It offers cost-effective reassurance that your spouse or partner, children, and other family will be able to maintain their lifestyle when you pass away.
If you die you want to make sure your life insurance payout goes to the right person or people. And, of course, you won’t be around to enable this.
Consequently, you need to ensure that there is a mechanism in place to deliver the policy proceeds to the appropriate people in a timely fashion.
If you’re married or in a civil partnership, your life insurance payout may form part of your estate and be paid to your spouse when you die. However, the probate process can take time and so there may be an uncomfortable wait for the money.
If you’re unmarried, then your life insurance payout may not automatically go to your partner when you die.
As more and more people cohabit without getting married or entering a civil partnership, there is an increasing chance that a life insurance payout might not go to the person you want.
According to the Office for National Statistics (ONS), more than two-thirds of people aged 16 to 29 years old who are living in a couple are cohabiting. Cover magazine reports the statistic that more than 1 in 3 (37%) couples under the age of 45 are not married.
Whatever your situation, there are two ways that you can help to ensure your life insurance goes to the right person or people when you die.
Putting your life insurance in trust is a simple and effective way of making sure your wishes are carried out – even when you’re no longer around.
A trust is a legal arrangement that enables you to leave your assets – in this case specifically the payout from a life insurance policy – to the people you nominate.
A trust enables you to keep control of your assets, and ensure any life insurance proceeds go to the people you want them to on your death. You decide who to appoint as your trustees – the people who manage the trust. So, you can nominate one or more family members, friends, or a legal professional to look after the trust on your behalf.
You can also nominate beneficiaries – the people who you want to benefit from the life insurance payout when you die.
Putting your life insurance in trust is especially important if you’re not married or in a civil partnership. As you read above, this is because your assets may not otherwise be transferred to your chosen beneficiaries.
Putting your life insurance in trust also means that your loved ones will be able to access the payout sooner.
Without a trust, your beneficiaries would need to obtain probate when you die, which can cause delays. If you have a trust in place, your loved ones could receive the inheritance within a couple of weeks of the death certificate being issued.
Additionally, putting your life insurance in trust means the payout from your policy should not be considered part of your estate. This means that any life insurance proceeds will typically not form part of your estate for Inheritance Tax purposes.
If you don’t put your life insurance in trust, you may find your estate has to pay 40% Inheritance Tax on some or all of the proceeds, depending on the total value of your estate.
Find out more about putting your life insurance in trust in this useful guide.
When you take out life insurance, you will normally have the option of putting the policy in trust.
A potential issue with trusts
When you put your life insurance in trust, you nominate trustees who have the power to decide who to pay the life cover benefit to. However, these trustees must work from a list of “discretionary beneficiaries” you include on the trust form. These people will usually be close family members such as spouses or children.
When completing this form, it can be easy to overlook your cohabiting partner. Or, you may have met your current partner since you took out your cover.
If your cohabiting partner is not named as a beneficiary, the trustees don't automatically have the power to award payment to an unmarried partner – even if the policy is written into trust.
If you don’t name them when you take out your cover, the only way of sorting this issue out is by naming your unmarried partner to the trustees in writing in a letter which you sign and date.
It can be an unnecessarily complicated process and something you might easily overlook. Yet, the consequences could be serious if the trustees are unable to pay the proceeds of your life insurance to your cohabiting partner in the event of your death.
So, a second option may be more suitable.
When you die, you want the proceeds of your life insurance to pass to your loved ones. That might include your unmarried partner.
Insurers including Guardian and Royal London have introduced a “beneficiary nomination process” into their application process when you take out life cover.
This gives you the ability to name your beneficiaries and the percentage of benefit attributed to each of them when you take out your life insurance. What it means is that, in the event of a claim, the life office will simply pay the benefit directly to those people.
And, because it's part of the insurance contract, not a trust, you don’t need to choose any trustees.
For example, you might say:
- Unmarried partner – 60% of proceeds
- Child 1 – 20% of proceeds
- Child 2 – 20% of proceeds
If you later change your mind about who you wish to benefit from your life policy, you can get in touch with the insurer and change the nominated beneficiaries. You can do this whenever you choose during your lifetime and the term of the policy.
And, if at a later date you think that writing the policy in trust would be more suitable, you can do this.
Helping you find the right cover and making sure the proceeds go to the people you want
Life insurance gives you valuable peace of mind that your loved ones will receive financial support if you die.
So, ensuring the money goes directly to the people you want it to, is crucial.
With most insurers, there is no additional cost for putting your life insurance in trust. Some, as you read above, will also now let you name beneficiaries during the application process.
We work with dozens of the UK’s leading insurers including household names such as Aviva, LV= and Legal & General. We’ll scour the market for you to find the lowest price for your cover, and assist with putting your policy in trust and nominating beneficiaries when you take out your cover.
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