life insurance

Why you should place your life insurance policy in trust

One of the main aims of future planning is to ensure financial security for your family and beneficiaries in case of your death. Life insurance is an ideal way to do this. Losing a partner or parent is one of the most harrowing experiences in life but fighting for a life insurance payout at the time it’s most needed can make it much worse.

A will is an important part of financial planning, but the making of a Last Will and Testament will not help avoid the following:

  • delays in receiving cash in the event of a claim
  • inheritance tax liability

If, when you die, the value of your estate is valued above £325,000 (if you’re single or divorced) or £650,000 (if you’re married or widowed), everything you own above this threshold will be liable to inheritance tax at 40%. Your estate includes all your assets such as your home, savings, possessions and any life insurance payment – unless it is written in trust.

So if, for example, your estate is valued at £525,000, your inheritance tax bill will be £80,000, which is 40% of the £200,000 above the £325,000 threshold. However, you don’t have to pay inheritance tax on life insurance policies which have been written in trust.

A trust is a simple legal document. Its creation means that you hand over your life insurance policy to trustees who become legal owners of your policy and take care of it on behalf of your beneficiaries. You will still be responsible for paying contributions, but the trustees will be in charge of storage of the Trust Agreement, and other documents. They make a claim for a payment from your policy, and make sure that the money goes to the beneficiaries, as per your instructions.

There are three key benefits to placing a policy in a trust:

control – you can decide who your beneficiaries are, in order to ensure the money will be given to the person you intended to give it to. This can be very important, especially if you have a previous meeting.

avoidance of inheritance tax – the money paid out from your life insurance policy will not constitute a part of your estate/property if it is “in trust”. This means it will not be subject to inheritance tax.

quicker payment – payment of claims will not be slowed down by any judicial consideration of the will – a process known as “probate”.

Currently, just one in in ten life policies is written in trust (source: This is Money)

Mark Locke, protection specialist at financial services consultancy The Lang Cat, said this could be because most financial advisers charge a fee for financial planning when putting a policy into trust. There may also be legal advice to pay for.  

He said: “When most people buy life insurance they’re looking for the cheapest deal which is why they don’t always think about what the consequences of not putting it into trust are”

Our life teams recommend that our clients place policies in a trust, and we offer help in all aspects of the organization of the trusteeship. You can draw up a Trust Agreement completely free of charge – you don’t need to alter the policy itself or take any new cover. Please feel free to speak to one of our advisors today.

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