Writing your life insurance in trust

Writing your life insurance in trust could not only ensure that your beneficiaries receive a greater proportion of the pay out sum, but also that they receive it faster.

Despite this, only 6% of policyholders currently write their life insurance policy in trust[1]. But why?

From our experience at Reassured the main reasons are:

  • The policyholder is simply unaware this option exists
  • The benefits of writing your life insurance in trust are misunderstood
  • The policyholder is confused and/or intimidated by the application process

Let’s take a look at how you write your life insurance in trust, so you can ensure you're making the most of your selfless investment.

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What is life insurance in trust?

Writing your life insurance in trust is a legal arrangement which allows you to ensure that your beneficiaries benefit as much as possible from your policy.

Insurance provider OneFamily defines a trust like this:

"A trust is a legal arrangement where you (the settlor) give an asset (such as a life insurance policy) to someone else (the trustees) to hold for the benefit of another person or group of people (the beneficiaries) until some time in the future"[2]

When arranging your life insurance policy, you'll be given the option to write your life insurance in trust.

This is a free option that involves putting someone you trust in charge of your life insurance policy.

Upon your death, they'll manage your pay out and ensure it's distributed as requested, similar to the executor of a will.

When choosing your trustees it's vital that you select people you trust as the funds of your life insurance and their distribution will be at their discretion.

After you're gone, the pay out sum from your life insurance will be paid to the trustees to carry out your wishes.

Trustees must be at least 18 years old and have a UK bank account.

Putting life insurance in trust - the benefits

There are 3 key benefits with regards to writing your life insurance in trust:

  • Avoid (or minimise) 40% inheritance tax (IHT)
  • Avoid the probate process
  • Have better control of your policy

This could really benefit your loved ones financially after you're gone. Let's look at each of these benefits in more detail.


1) Avoid or reduce 40% inheritance tax (IHT)

In the UK, if your estate exceeds £325,000 (if you're single or divorced) or £650,000 (if you're married or widowed) it's subject to 40% inheritance tax[3].

If not written in trust, the value of your life insurance forms part of your legal estate. If you own a property and a healthy life insurance policy, many UK estates can easily exceed this threshold.

For example, if your house is valued at £600,000 and your life insurance is worth £125,000, then your total estate would be valued at £725,000.

In this instance, you would be subject to £160,000 inheritance tax, (40% of the £400,000 above the £325,000 threshold).

Writing your life insurance in trust detaches the policy from your estate, meaning it's paid directly to your beneficiaries and therefore not subject to inheritance tax.

You may think your estate could never exceed the threshold, but, remember it includes any savings and possessions you have, as well as your property and life insurance policy.

Also, large assets like properties, are likely to increase in value over time. So, if you set up your life policy 20 years ago, your home is probably worth much more now.

According to Zoopla, house prices in England increased +271.27% in the last 20 years. In 2017, the average cost of a house in the South East was £415,084 and £671,047 in London[4].


2) Avoid probate

Probate is the legal process which confirms that your executors are in the position to administer your estate.

The majority of estates in England & Wales take around 6 to 9 months for beneficiaries to receive their inheritance[3].

This process can be lengthy, and your loved ones will not be able to make a claim until probate has been granted.

Writing your life insurance in trust detaches it from your estate meaning a claim can be filed as soon as the death certificate is produced.

Generally speaking, funds from a policy in trust are received within just a few weeks and are then available to finance expenses such as your funeral.

In contrast, if your policy is not in trust and the estate has to file for an (estate) tax return, there's no will or there's conflict between beneficiaries, this can make probate even more difficult.

On occasions taking months, sometimes years.


3) More control over your policy

If your policy is not put in trust, the pay out funds could be forced to pay off outstanding debts, rather than going to your loved ones as intended.

Writing your life insurance in trust allows you to take more control and specify who you wish to receive the pay out, when and how you want it distributed.

For example, if you have young children, writing your policy in trust also allows you to instruct your trustees to keep control of the funds until they reach a certain age (for example, 21).

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Does writing your life insurance in trust cost anything?

No. Writing a policy in trust is a free service provided by the majority of insurers.

As a broker, we are 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.

FREE trust service from Reassured

At Reassured, we offer free guidance and support to help our customers write their life insurance in trust.

Contrary to popular belief, writing your life insurance in trust doesn’t have to be a difficult endeavour.

We offer customers a simple, non-advisory run-through of the trust application form (flexible or discretionary trusts), without any complex legal jargon.

This ensures you fully understand each stage, so you can be confident your policy is dealt with as you wish after you're gone.

Why use Reassured to help write your life insurance in trust?

  • We offer a dedicated, free trust service team to help you with the application process
  • We can help you with the forms and explain any confusing legal jargon
  • We're completely impartial and independent
  • We have an ‘Excellent‘ average Trustpilot rating of 9.6/10 from 41,000+ reviews.

Our friendly customer service team can be reached between 09:00-17:30 on 0808 168 2025, (select option 1, then option 2) or via email customer.services@reassured.co.uk.

Types of trust

The type of trust you choose to write your life insurance into will affect the flexibility you have to make changes at a later date.

There are 3 main types of trust with which a policy can be written:

Absolute trusts (sometimes known as 'Bare' or 'Fixed' trusts)

  • You name the beneficiaries at the start of the policy
  • You decide how the pay out is split between beneficiaries
  • Your decisions cannot be changed at a later date


Flexible trusts

  • You name the beneficiaries, (known as the 'default' beneficiaries)
  • You can also name 'potential' beneficiaries, (like future grandchildren)
  • The trustees have the ability to change the default beneficiaries
  • The trustees can change the pay out split between default and potential beneficiaries to meet your wishes
  • This is a good option if you think your circumstances may change


Discretionary trusts

  • The most flexible trust option, as there are no named default beneficiaries
  • You provide a list of potential beneficiaries but give trustees total discretion as to who'll benefit and how much they'll receive
  • A discretionary trust also allows the addition of potential beneficiaries
  • However, you (the settlor) have no overall control over who gets the pay out - it's down to the trustees
  • You can send a 'letter of wishes' detailing how you would like the pay out split, but there's no legal obligation for the trustees to adhere

Regardless of the trust type you choose, it's worth noting that once a policy is written in trust it can be difficult to make changes or take out of trust.

Therefore, it's important to consider any changes in circumstances you may experience in the future, for example, divorce or having additional children, as this could change your chosen beneficiaries.

Please note: At Reassured we only provide policies with flexible or discretionary trust types.

Life insurance in trust on an existing policy

In the majority of cases, an existing life insurance policy can be written in trust.

You may have only just become aware of the option to write your policy in trust and the associated benefits. However, don't worry, in the majority of cases an existing policy can be written in trust.

To do this, it's best to contact your insurer and query whether or not this is an option.

Provided the answer is yes (which is highly likely), you can then print the relevant trust form either directly from the insurer's website or from us, (see below).

Joint life insurance in trust

You may ask yourself can a joint life policy be written in trust?

Generally, joint life insurance policies don't need to be written in trust for inheritance tax purposes.

Most joint life insurance policies operate on the basis that a pay out is made upon the first death.

In this instance, the pay out would usually be paid to the remaining spouse/civil partner who would then be exempt from inheritance tax.

However, if both partners were to die together or your policy was joint survivorship life insurance (when a pay out is made on a second death basis), the beneficiary would be subject to inheritance tax.

For this reason and to avoid the lengthy probate process, it would be beneficial to write your life insurance in trust even if it's a joint policy.

Can a trustee be a beneficiary of a trust?

Yes. Having a trustee who is also a beneficiary of a trust is generally allowed and commonplace in family trusts.

However, where trustees are granted discretionary rights, it may be advisable for there to be at least one independent trustee who won't benefit from the trust.

Often, policyholders name their partner or children as trustees.

Trust terminology

Legal terms that you're likely to encounter when writing your policy in trust include:

  • Settlor - The person/s (policyholder) who gives the asset (life insurance policy) to the trustee/s
  • Trustee - The person/s who looks after the trust fund on behalf of the settlor
  • Beneficiaries - The person/s who are nominated to benefit from the trust fund

Life insurance in trust summary:

  • For most policyholders writing their policy in trust brings significant benefits
  • Larger pay out, (40% inheritance tax can be avoided)
  • Faster claims process, (you don't have to wait for probate)
  • Greater control of who gets the pay out and when
  • Most insurers are able to offer guidance free of charge
  • Existing policies can be re-written in trust, (check with your insurer)
  • Once written in trust it can be hard to amend or cancel
  • There are different types of trusts (absolute, flexible and discretionary)

Need help with your trust application? Contact our FREE trust service

At Reassured, we'll help you find the most suitable life insurance cover, as well as help you write your policy in trust.

Although we're unable to offer advice on what you should do, we'll provide you with enough information to help you make an informed decision.

We're now the UK's largest FCA registered life insurance broker and our quote service is free to you.

Writing your life insurance in trust doesn’t have to be difficult.

Our dedicated customer service team can be reached between 9am-5.30pm on 0808 168 2025, (selecting option 1, then option 2) or email customer.services@reassured.co.uk.

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Sources:

[1] https://www.confused.com/life-insurance/guides/writing-life-insurance-in-trust

[2] https://www.onefamily.com

[3] https://www.gov.uk/inheritance-tax

[4] https://www.zoopla.co.uk/house-prices/browse/england/?q=England

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