Writing Your Life Insurance Policy in Trust
Every year, thousands of life policies are taken out in the UK but less than 10% of these are put into trust (often referred to as “writing life insurance in trust”). Given the advantages of these trust arrangements, this is somewhat surprising, especially as it should form part of the discussion your adviser has with you when helping to plan for your family’s future financial security.
Advantages of writing a life insurance policy in trust
Minimise inheritance tax
This is potentially the biggest advantage, as depending on your circumstances at the date of your death, writing your life policy in trust may save up to 40% of the policy monies being paid in inheritance tax. Some life policies are taken out with the specific intention of funding the inheritance tax liability on death, and will be written in trust to ensure that the policy proceeds are available straight away to the family or executors to pay the IHT.
Avoid the need for a grant of probate
Writing your life policy in trust also means that your loved ones are likely to receive the policy monies much quicker than if there is no trust because the insurance company will only require sight of the death certificate. Typically, the insurance company will pay out within a few weeks of the death if the policy has been written in trust but if it hasn’t been, your executors will need to go through the process of applying for a grant of probate. This will delay the pay out of the policy for some months which may not be helpful, bearing in mind that inheritance tax often has to be paid within 6 months of the death (depending on your assets).
Greater control over your policy
Writing your life policy in trust guarantees that the monies will be paid to the people you intend it to, offering you peace of mind. In contrast, if you haven’t written your life policy in trust and you owe money at the date of your death, your loved ones may find that the policy monies are used to pay off your debts rather than being paid to them.
Critical Illness Element
Many life policies contain a critical illness element which means that the life insurance company will pay out on your policy if you suffer from any illnesses or injuries that are defined in the policy document. Care needs to be taken here, because it is likely that you will not want to give away the benefit of the critical illness cover (which you may depend on financially) as well as the death benefit. The answer is to use a split trust, by which you retain the benefit of any payout from the policy resulting from suffering a critical illness but the death benefit is held in trust for your family members.
Possible Tax Implications
Although writing your policy in trust can offer substantial inheritance tax advantages for your family on your death (see above), there could be inheritance tax implications in doing so depending on:
- the type of policy you have (e.g. a whole of life policy or term policy)
- the type of trust you wish to use
- your general state of health when writing the policy in trust
We therefore recommend that you take appropriate legal and tax advice before proceeding.
It is worth considering writing any type of life insurance policy in trust, although it will not be appropriate where the policy is being taken out to protect a mortgage or other loan and it is being assigned to the lender as security for the loan.