Writing your life insurance policy in trust

Many people have life insurance policies and most of them are linked to the repayment of mortgages and other loans. But for those who have a policy to provide an additional lump sum payment on the event of their death for their family, they should consider writing it into trust, which can have many advantages.

Inheritance Tax planning

This is one of the areas where most people will find the greatest advantage, as depending on your financial 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 people take out life policies with the specific intention of funding the inheritance tax liability on death, which will be written into trust to ensure that the policy proceeds are available straight away to the family or executors to pay the IHT.

Grant of Probate

Your beneficiaries will receive money faster if you have written your life policy in trust, because the insurance company will only need to see a copy of the death certificate. This typically takes a few weeks rather than the executors of your Will having to go through the process of applying for a grant of probate. Inheritance tax needs to be paid within 6 months of the death and it may take longer than this without it written in trust.

Money goes to the intended recipients

By writing your life policy in trust the money will be paid to the people you name as beneficiaries, however if you haven’t written your life policy in trust and you also have debts at the time of your death, your beneficiaries may find that the policy money is used to pay off the debts first.

Critical illness cover

Many life policies have critical illness cover which will pay out if you suffer from any illnesses or injuries that are listed in the policy document. You do however need to be careful to consider that you may not want to give away the benefit you could receive from the critical illness cover, especially if you would depend on it financially, as well as the death benefit. The answer is to use a split trust, which allows you to retain the benefit of any critical illness payout from the policy, but the death benefit is still held in trust for your family members.

We always recommend clients review their Will every few years to take into account any changes in their circumstances or financial position and we would also suggest clients review these arrangements with their accountant to ensure the best solution is found for their unique situation.

Alex Astley can be reached at a.astley@gullands.com.