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Revealed: The value of putting your life insurance in trust

Revealed: The value of putting your life insurance in trust

Jan 6, 2021

The main benefit of life insurance is that you can provide financial support to your loved ones when they need it the most. At a difficult and emotional time, you know that there will be a lump sum available to protect those you care about.

So, it follows that you need to make sure that the proceeds of your life insurance policy go to the right people, as quickly as possible.

This is where a trust comes in. 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.


What is a trust?

A trust is a straightforward legal arrangement that enables you leave your assets – including the proceeds of a life insurance policy – to whoever you choose to be your beneficiaries.

The trust is managed by one or more trustees – more about this in a moment – until the trust pays out to your beneficiaries. Where a life insurance policy is concerned, this happens on your death.

Writing life insurance in trust requires three parties:

  • The settlor – This is the person who currently owns the life insurance policy and who wants to set up the trust. In this case – that’s you. You’re responsible for paying the premiums on your life insurance policy, but when you set up a trust you transfer the legal ownership of the proceeds of the policy to the trustees.
  • The trustees – The settlor is normally also a trustee and must appoint at least one other trustee. This is often a close friend, solicitor, or family member. You can pick one or more trustees, but they must be over the age of 18 (and it can be more straightforward if you pick a UK taxpayer).
  • The beneficiaries – These are the people you nominate to receive a payout from the trust. These will typically be your loved ones, family, or friends.


The common types of trust

There are various types of trust you can put your life insurance policy into.

Discretionary trusts allow you to choose a wide range of potential beneficiaries, and to add beneficiaries after you have set up the trust. The trustees ultimately decide who will receive any money and how much, although you as the settlor can write a ‘letter of wishes’ to provide guidance on how you would like the money to be distributed.

Absolute trusts are more inflexible, and you can’t change them. This means you nominate your beneficiaries when you set up the trust. So, for example, you can’t later add any children or grandchildren as beneficiaries after you have set up the trust.

Split trusts can be useful if you have both life insurance and Critical Illness cover. This is because a split trust enables you to split out the Critical Illness cover for the benefit of the settlor (you) while ensuring that life insurance is held for your beneficiaries.

We can help you to establish which is the most appropriate type of trust for you.


3 benefits of putting your life insurance in trust

1.Keep control of your assets

When you put your life insurance in trust, you can retain some control over how the proceeds are distributed. You can decide who to appoint as your trustees and beneficiaries, so you select the trusted people who will control the money, and the people who will benefit from the payout.

This makes putting your life insurance in trust especially important if you’re not married or in a civil partnership as, otherwise, your assets may not be transferred to your chosen recipient(s).

2.Mitigate an Inheritance Tax liability

When you die, your estate is valued for Inheritance Tax purposes. If the total amount is below £325,000, or you leave your entire estate to your spouse, civil partner, charity, or a community amateur sports club there is no tax to pay.

While the proceeds of a life insurance policy are not subject to Income or Capital Gains Tax, they are potentially liable to Inheritance Tax (IHT), which is charged at 40%. If you add the proceeds of a life insurance policy to the value of a property or other assets, it’s easy to see how you might have an IHT liability.

When you set up a trust, you effectively transfer ownership of the life insurance policy to the trust (remember that you remain responsible for paying the premiums). Doing this means that the proceeds are not included within your estate, so they do not affect the IHT calculation and will be paid in full.

3.Your loved ones get access to the money quicker

If you die without putting your life insurance in trust, your beneficiaries will need to obtain probate in order for a claim to be paid. This can cause delays and mean that it takes weeks or even months for an insurer to pay the proceeds of the policy.

When your put your life insurance in trust, your loved ones could receive the inheritance within a couple of weeks of the death certificate being issued.


What to consider when setting up a trust

  • When you select trustees, it can be wise to choose people who are likely to outlive you. If you choose a solicitor, the trust will be managed by the firm if the individual were to die before you
  • You can change trustees (for example, if one wants to retire) as long as all the other trustees agree. If a trustee dies, the others can choose a replacement
  • If your fail to pay your life insurance premiums, the trust will cease (as will the policy itself)
  • The trust deed sets out the terms and conditions of the trust and must be signed by you (the settlor) and the trustees. If it is a joint life policy, both settlors must sign the deed.

How do I put my life insurance in trust?

When you buy life insurance, the insurer will be able to put the policy into trust for you. You’ll need to provide details of the trustees and beneficiaries.

We can also help with putting your life insurance policy into trust. Head to our website to compare life insurance quotes and get in touch with us if you need any assistance in placing your policy into trust.

If you already have a life insurance policy, but it is not written in trust, you can arrange for it to be put into trust. Talk to the insurer to find out more about your options and how they can help you to write the policy in trust.

If you have life insurance through your employer (usually called ‘death in service’ benefit), any payout would normally be made through a trust set up by your employer.

Do I have to pay to put my life insurance in trust?

With the majority of insurers, there is no additional cost for putting your life insurance in trust.

As above, you can put your life insurance policy in trust when you take it out, or often at any time after that. You just need to be the ‘owner’ of the policy.

Get in touch

If you’re looking for low-cost life insurance, we can help. We work with dozens of the UK’s leading insurers to find you the right cover at the right price. We even take less than the standard commission to drive down the cost of your premiums.

We can also help you with putting your life insurance in trust.

Compare cheap life insurance online or contact us today to find out more.



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