Is life insurance taxable?
Ever wondered whether your life insurance proceeds are…
5 min
When you take out life insurance, you may be given the option to write your policy in trust.
This is a legal arrangement which allows you (the settlor) to specify who’ll benefit from your policy (the beneficiaries) in the event of your death.
It also allows you to select certain people you trust (trustees) to manage the pay out on behalf of your beneficiaries after you’re gone.
You'll complete the document online which sets out the rules of how you wish your life insurance to be distributed.
When you pass away, it’s the trustees’ responsibility to claim on your policy and ensure the beneficiaries receive the funds as instructed - whether that be upon your death or at a specified time.
When life insurance is written in trust, you’re essentially handing over ownership of your policy to someone else, which means it’s no longer considered part of your estate.
This has several valuable benefits, which we explain in more detail below…
Who’s involved in a trust?
Settlor: The person/s (policyholder/s) who sets up the trust and decides how the policy is managed. They will also continue to pay the monthly premium.
Trustees: The people who legally own the trust and manage the policy according to the settlor’s wishes. They can be a legal professional, family member or friend.
Beneficiaries: The person/s who will benefit from the trust on a date specified by the settlor. They can be family members, friends, or a charity.
The main benefits of putting life insurance in trust are as follows:
Avoid or minimise inheritance tax
Putting your life insurance in trust is an important consideration if you have a large estate - which includes any money, possessions, and property you own at the time of your passing.
If your policy isn’t written in trust, it will form part of your estate when you pass away. If the total value of your estate exceeds the £325,000 tax-free threshold, then your life insurance pay out could be subject to 40% inheritance tax.
However, by placing your policy in a trust, the proceeds won’t be considered part of your estate, helping to avoid or minimise your inheritance tax liability. This ensures a larger pay out for your loved ones.
Many people take out life insurance to help cover an inheritance tax bill on an estate worth over the £325,000 threshold. In this case, it’s important to write the policy in trust so that a full pay out can be made.
Avoid the probate process
Probate is a legal process that involves distributing your estate after you pass away. In England and Wales, it takes between 9 and 12 months on average to complete[4].
If your life insurance policy is written in trust, the proceeds will be dealt with separately from your estate, so your loved ones won’t have to wait for probate before they can receive the pay out.
Once the death certificate is produced, your trustees can make a claim and the funds could be available within a matter of weeks.
This is particularly beneficial if your loved ones will need some help covering immediate costs after you pass away, such as legal fees or funeral costs.
Better control over your policy
If your life insurance isn’t put in trust, the pay out funds could be forced to pay off outstanding debts in your name, rather than going to your loved ones as intended.
Writing your life insurance in trust allows you to specify who’ll be in charge of the pay out and who’ll receive it, as well as when and how you want it distributed, after you’re gone.
For example, you may want the trust to only pay out when your beneficiaries reach a certain age, such as 18.
Co-habiting couples who have single life policies in place will also benefit from writing their policy in trust, as not doing so won’t give their partner any legal right to receive the pay out funds if a claim is made.
It’s important to consider both the advantages and disadvantages of putting life insurance in trust before making a final decision.
For more information on the potential disadvantages of writing your life insurance policy in trust, get in touch with Reassured.
One of our experts can run you through the pros and cons to help you decide if this is the right option for you and your family.
Putting your life insurance in trust doesn’t cost you anything. It’s a free service provided by most insurers.
As a broker, we’re trained to talk you through the trust application process. Our service is also offered completely free of charge.
However, trusts can sometimes be a complex process and if you choose to seek further financial advice, there may be a cost.
Please note, our trust service will never advise you on what to do. Although, we will provide you with enough information to help you make an informed decision.
To date, the trust team at Reassured has helped more than 12,000 customers put their life insurance in trust.
There are different types of trusts available, the one that’s right for you will depend on the type of life insurance you have chosen and how much flexibility you’d like.
Some insurers also offer a ‘split trust’ for some policies. This gives you option to split your potential pay out between your policy and the trust, allowing you to retain some of the cover included with your policy.
For example, if you have life insurance with critical illness cover, or free terminal illness cover included as part of your policy, you can still make a claim if you become ill during the policy term.
At Reassured, we offer a universal digital trust form with selected policies. The universal form is flexible and allows you the option to split the trust, specifying which benefits you wish to gift and which you wish to retain. This trust provides you with the most flexibility.
Make the most of our fee-free service to learn more about each option. Our experts can help you decide which may be the best option for you and your loved ones.
You can choose one person or multiple people to benefit from your life insurance policy if you were to pass away during the term.
Most commonly, partners and children are named as beneficiaries. However, you can also name:
If you’d like to leave an inheritance to your future children, or grandchildren, then the funds would need to be held in the trust until they reach 18 (when they can legally benefit).
You can also decide how the pay out is divided up between your beneficiaries. For example, you could leave 50% to your partner and 50% to your children.
With flexible and discretionary trusts, trustees have the power to add and remove beneficiaries, as well as decide how and when the pay out is distributed.
A trust requires at least two trustees over the age of 18 to oversee the trust and manage your life insurance policy on behalf of your beneficiaries.
They can be:
With some types of trust, you can nominate yourself as a trustee, which allows you to keep some control of your policy and what happens to the trust while you’re still living.
When choosing additional trustees, it’s important to think carefully about who will carry out this role. Some things to consider:
In some circumstances where a trustee is not following the terms of the trust document, it’s possible to request that they’re removed.
Yes. Having a trustee who’s also a beneficiary of a trust is generally allowed and commonplace in family trusts.
However, where trustees are granted discretionary rights, it may be worth having at least one independent trustee who won't benefit from the trust.
A joint life insurance policy covers two people at the same time and only pays out once when the first person passes away.
It’s usually taken out by married couples or couples in a civil partnership who’d be exempt from inheritance tax if a claim was made.
As a result, it’s not common for joint life insurance to be written in trust for inheritance tax purposes. However, in some cases, it can be beneficial.
For example:
Joint life insurance can be a good option for couples who wish to save money on their life insurance premiums.
However, if one partner passes away during the policy term and a pay out is made, it leaves the surviving partner without any cover.
Taking out two separate policies written in trust will ensure that your children or other dependents will still receive an inheritance after you’re gone.
Unmarried couples don’t have the same legal rights as married couples, which can pose some issues when it comes to life insurance pay outs.
If your life insurance is not written in trust and you don’t have a Will, then the proceeds from your policy will go to your estate when you pass away.
Your estate will then be distributed to your closest living relatives - and your cohabiting partner won’t be legally entitled to receive anything.
Putting your life insurance in trust could be a sensible option if the purpose of your policy is to financially protect your partner (and other dependents) if you were no longer around.
In the UK today, there are around 3.6 million cohabiting couples[5] – contributing to the increasing number of people who take legal action to claim their inheritance[6].
To help you easily weigh up the pros and cons of writing your life insurance policy in trust, we have compiled these in the table below:
PROs | CONs |
---|---|
It’s free to set up | Not all policies can be written in trust |
Avoid or minimise inheritance tax & maximise pay out | It can be difficult to amend the policy or take it out of trust once the trust is set up |
Avoid probate & speed up pay out | You lose some control of your policy while you’re still alive (any changes must be signed off by the trustee) |
Greater control over who gets the pay out and when | With some types of trusts, the trustees can add or remove beneficiaries at their discretion |
Flexibility with some trusts to add or remove beneficiaries or trustees | Will cost money if you choose to hire a legal professional to act as a trustee |
With some types of trusts, you can nominate yourself as a trustee (allowing you to make changes to the policy if you need to) |
|
Most life insurance policies arranged through Reassured can be written in trust by filling in our simple online trust form.
Here’s how it works:
If you have any queries about our trust form, please contact us on: 0808 168 2025 between 09:00 - 17:00, Monday to Friday or email customer.services@reassured.co.uk.
Please note, we’re unable to provide advice on writing your life insurance in trust. If you need further help, you may wish to speak to a legal and/or financial advisor.
As the UK’s largest life insurance broker * , Reassured can help you compare multiple life insurance quotes from some of the UK’s biggest insurers to help you find a fantastic deal.
Simply get in touch for our fee-free, no-obligation comparison and trust-writing service.
Is life insurance part of an estate?
Yes, as mentioned, life insurance is usually considered part of your estate if it’s not written in trust.
This means the pay out could be subject to inheritance tax and probate if you were to pass away during the policy term.
By writing your life insurance in trust, you’ll have peace of mind that the money will go directly to your beneficiaries and not to your estate in the event of your death.
Do you pay inheritance tax on life insurance in trust?
No, one of the main reasons people choose to write their life insurance in trust is to avoid inheritance tax for their loved ones.
Writing your policy in trust will transfer ownership of the policy to your trustees, so it’s no longer considered part of your estate.
This will ensure that your loved ones will receive the full lump sum pay out after you’re gone, as per your wishes.
Can you put an existing life insurance policy in trust?
Yes, it’s possible to put an existing life insurance policy in trust.
If you’ve already taken out a policy through us and you’d like to place it in trust, then contact our customer services team on: 0808 168 20 25 and we’ll arrange for a digital trust form to be emailed out to you.
This removes the need for printing, posting and can be completed online in minutes.
If you’re aware of the trust options but you’re not ready to set one up with your new policy, you can choose to do this at a later date.
In some cases, it may be necessary to hire a professional advisor or solicitor to help with writing your existing life insurance in trust.
Why should you not put life insurance in a trust?
In many cases, it could be wise to write your life insurance in trust. However, it’s not the right option for everyone.
For example, you may not be concerned about inheritance tax if the value of your estate (including your life insurance pay out) is below the £325,000 threshold.
Or, if your estate is worth over £325,000, but you’re leaving everything to your spouse or civil partner, inheritance tax doesn’t apply.
Or, if you’re leaving your home to your children or grandchildren, then your tax-free threshold may increase to £500,000.
Writing your life insurance in trust may also not be worthwhile if the pay out isn’t intended for young children or those under the age of 18.
Can you cancel a life insurance policy in trust?
Yes, you can cancel your life insurance policy that’s written in trust. This will also void the trust you’ve set up. With some trusts, you may need permission from the trustees to cancel.
If you cancel within the 30 days cooling off period, you’ll receive a refund of any premiums paid. If you cancel after 30 days, your premiums won’t be refundable.
Below we have listed various trust documents and guides from some of the biggest life insurance providers in the UK.
Please note, we’ve simply provided these documents for your information.
As we offer a universal digital trust form and guide at Reassured with most of the insurers we work with, there’s usually no need to download or print any documents when arranging life insurance in trust through us.
If you have any queries or need support regarding the trust forms listed, you’ll need to contact the insurer directly.
Aviva BCC
PO Box 520
Norwich
NR1 3WG
The Exeter
Lakeside House
Emperor Way
Exeter
EX1 3FD
Legal & General
City Park
The Droveway
Hove
East Sussex
BN3 7PY
LV=
Freepost RSSL-HSKC-STHS
LV= Trust
Pynes Hill House
Rydon Lane
Exeter
EX2 5SP
One Family
16-17, West Street
Brighton
BN1 2RL
Zurich Assurance Ltd
Tricentre One
New Bridge Square
Swindon
SN1 1HN
Royal London
Royal London House
Alderley Road
Wilmslow
Cheshire
SK9 1PF
Vitality Life
Customer Services
Sheffield
S95 1BW
Aegon
Edinburgh Park
Edinburgh
EH12 9SE
[1] https://www.covermagazine.co.uk/news/4074338/role-life-insurance-trusts-scrutiny-pay-risk
[2] https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary
[3] https://www.nimblefins.co.uk/average-inheritance-and-inheritance-tax-uk
[4] https://www.co-oplegalservices.co.uk/media-centre/articles-may-aug-2017/how-long-does-probate-take-if-there-is-a-will/
[5] https://researchbriefings.files.parliament.uk/documents/SN03372/SN03372.pdf
[6] https://www.stephens-scown.co.uk/disputes-with-individuals/inheritance-and-trust-disputes/battle-of-wills-inheritance-disputes-on-the-rise/