What is writing a life insurance policy in trust?
A trust in life insurance terms is simply a legal arrangement designed to ensure that the proceeds from your policy are distributed as you intended.
The policy is looked after by a nominated trustee until the time comes for the benefit to be released to your beneficiaries (normally when the policyholder dies).
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” – (source: www.onefamily.com).
Maximise your investment in life insurance
When you invest time and money arranging life insurance, you want to ensure that your loved ones receive the full benefit of your investment.
Putting your life insurance policy in trust, commonly referred to in insurance as ‘writing’ your policy in trust, can help provide this reassurance.
The main benefits of writing your policy in trust are avoiding large inheritance tax bills and bypassing the lengthy probate process. Despite this, only around 6% of policyholders do it.
The benefits of writing your policy in trust:
There are 3 main benefits from writing your life insurance policy in trust:
1) Avoid or minimise 40% inheritance tax (or IHT)
Inheritance tax laws in the UK state that if any part of your estate is valued over £325,000 (if single or divorced), or £650,000 (if married or widowed), it is taxed at 40%.
If you own a property and have a healthy life insurance policy, many UK estates will easily exceed this threshold.
If your house is valued at £600,000 and your life policy £125,000, then your estate would be valued at £725,000 minimum. In this simplified scenario, your inheritance tax bill would be £160,000, (40% of the £400,000 above the £325,000 threshold).
However, by writing your policy in trust you can ensure the pay out is paid directly to your beneficiaries. This means that the funds avoid forming part of your estate and are not subject to inheritance tax.
You might think your estate would never exceed the threshold, but, remember it includes any savings and possessions you have too, 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.
Have your personal circumstances changed? Does your life insurance policy still meet your needs? If not, contact Reassured to discuss your options.
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 – (source: www.zoopla.co.uk).
2) Avoid pay out delays due to probate
Probate is the legal process which confirms that your executors are in the position to administer your estate. This process can take time, and your family cannot make a claim until probate is granted.
If the estate has to file for an (estate) tax return, there is no will, there are a large number of or conflict between beneficiaries, this can make probate even more difficult to obtain. On occasions taking months, sometimes years.
“The majority of estates in England & Wales take around 6 to 9 months for beneficiaries to receive their inheritance” – (source: www.co-oplegalservices.co.uk).
However, by writing your policy in trust you can bypass probate altogether. Your family will then be able to access the funds faster, potentially helping finance large expenses, such as funeral costs.
Generally, funds are received from a trust just a few weeks after the death certificate is produced.
3) Keep control of your policy pay out
Writing your life insurance in trust can also help you to specify exactly how who and when you want the policy funds to be distributed.
For example, if you have young children you may want to instruct your trustees to keep control of the pay out, until they turn 18 or finish university. (Although, this request would be at the discretion of the trustees).
If your life policy is not in trust, the funds could be forced to pay off outstanding debts, rather than going to your loved ones as desired.
FREE trust service with Reassured
We offer customers a simple, non-advisory run-through of the trust application form (flexible or discretionary trusts), without any complex legal jargon.
When you receive your introductory pack in the post from us, it will contain a trust form from the insurer.
If you feel like this is something you would like to discuss, give our customer service team a call 0808 168 2025, (selecting option 2).
Do you help customers with the application process?
Yes. Our customer service team are happy to help with absolutely any question or query customers may have.
The most important thing for us is that you feel you have made an informed decision, you are able to ask any questions and that you have complete peace of mind.
Your nominated trustee should always be someone you completely trust to deal with the pay out on your behalf. You are signing all rights to the policy over to them.
When you pass, the money is paid directly to your trustee and it is up to them to carry out your wishes. Often, policyholders name their partner or children as trustees.
Please note, trustees must be over 18 years of age and have a UK bank account.
The settlor and beneficiaries
Other legal terms that you are likely to encounter when writing your policy in trust are ‘settlor’ and ‘beneficiaries’.
- Settlor – The person (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.
The different types of trusts
There are 3 different trust options when it comes to life insurance. Please note, at Reassured our trust service only provide support for discretionary and flexible trust applications.
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 the beneficiaries
- Your decisions cannot be changed at a later date.
- 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.
- This is 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 will benefit and how much they 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 is down to the trustees
- You can send a ‘letter of wishes’ detailing how you would like the pay out split, but there is no legal obligation for the trustees to adhere.
Is it difficult to put your policy in trust?
No. Putting your policy in trust need not be difficult or expensive. It could also make all the difference to your loved ones when they come to make a claim.
Your insurance provider should be able to provide you with a trust option, free of charge when taking out a policy.
Some applicants can become confused or intimidated by the trust application form, which can be lengthy and include insurance jargon.
If you are finding the documentation hard to understand, our free ‘trust’ team could help.
Can an existing policy be written in trust?
In most cases, yes. Even if you have an existing life insurance policy, you should be able to re-write it in trust. However, check with your particular insurance provider.
Why do so few people put their policy in trust?
Given the benefits, you might be confused as to why only 6% of policyholders have their policy written in trust?
We think that the take up is so low because policyholders do not know about this option, they do not understand the benefits, or are confused by the application process. Again, our free trust service can help.
Are there disadvantages to using a trust?
Once a policy is written in trust it can be hard to make changes or take a policy out of trust if your circumstances change. With Absolute trusts, you cannot make amendments.
For example, if you divorce or have another child you may wish to change who the beneficiaries are, what they receive and when.
If your financial situation is complex and you own many assets or have multiple business interests, a trust might not be suitable. In this case, you should probably seek independent legal/financial advice.
With flexible and discretionary trusts, it is vital that you select trustees you wholly trust as they hold a lot of power over who will benefit from the policy.
Should you write a joint policy in trust?
Joint life insurance policies, that protect your partner on a first death basis, do not usually need to be written in trust for inheritance tax purposes.
This is because there is a spouse/civil partner exemption and usually no tax liability applies when assets pass from one spouse to the other.
There are 2 uncommon scenarios’ when a joint policy could benefit from being in trust:
- If both you and your partner die at the same time
- If your joint life insurance policy is on a second life basis.
Policy in trust summary:
- For most policyholders putting their policy in trust can bring significant benefits
- Larger pay out, (40% inheritance tax can be avoided)
- Faster claims process, (you do not have to wait for probate)
- Greater control of who gets the pay out and when
- Most insurers are able to offer 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).
Why use Reassured to arrange your life cover and write in trust?
- We offer a dedicated free trust service to help you with the application process
- We can help you with the forms and explain any confusing legal jargon
- We never charge you a fee for our life insurance broker service
- We are completely impartial and independent
- 13,500+ people cannot be wrong! We have an ‘Excellent‘ average Trustpilot rating of 9.6/10
- We are a non-advised life insurance brokers. We simply listen to your personal circumstances and find you the best quotes.