Life Insurance in Trust 2023

When you arrange life insurance it is meant to be because someone will be financially at risk if you die. This is known as ‘insurable interest’.

An insurable interest could be dependent partners or children, or other people that could struggle if your income no longer comes into the household, they inherit your mortgage, or they inherit your estate that has quite a large value. There are lots more reasons but I don’t want to bore you with a long list!

In the past everyone used to focus on Trusts being for ‘rich’ people facing inheritance tax, but Trusts are absolutely for everyone and I’m going to tell you why.

Trusts are a legal document that tell the insurer, your loved ones and HRMC who you want to get the money from a life insurance claim. Here are some reasons why putting your life insurance in Trust will benefit you and your loved ones.

• It saves squabbles when you die because it’s a clear statement of who you want the money to go to.
• It means that you don’t need to wait for probate for the money to be paid out, which can often take months!
• It keeps the money away from the value of your estate for IHT calculations, if you are in this position. 

The key thing about a life insurance claim payout is getting the money to the people who need it as soon as possible.  For most people this is the reason that a Trust stands out. Without one your loved ones could wait months for the payout, with a Trust the claim could pay to you within a couple of days.

When you arrange a Trust you will be asked to nominate some Trustees for the policy. These are people that you trust completely, to pay the claim to your loved ones the way you want it to paid. You are usually the first Trustee as the policyholder.

When making your decision about other Trustees it’s usually quite simple. If you are putting life insurance in place for your partner to benefit from, then you often name them as a Trustee and a Beneficiary (more on this below).

It’s really important to choose someone that you trust completely. I can’t state this enough. This is because this person becomes an owner of your policy, as well as you. They also have ultimate decision as to who the money goes to. You don’t want to choose someone that might turn around and say “I promise to use this money for the benefit of your children and as they are under 18 I made the decision that they needed a £250,000 Lamborghini”.

They would get immensely told off for doing this, but you wouldn’t want to be in a position where this could happen.

Sometimes it can be worth considering having more than one Trustee. As an example, you have a couple and they put each other as Trustees on their life insurance policies, but they both pass away at the same time. Let’s say that they have children under the age of 18 too.

In this instance you really want to avoid a situation where the money is delayed in getting to the children, so that their guardian can make sure their financial needs are met. It’s sometimes a good idea to think about who you would want to raise your children if you die, and consider them as a Trustee. If you trust them to raise your kids, then it’s likely that they are trustworthy enough to look after a life insurance claim for them.

If you want to amend your life insurance you can often find that you need permission from all of the Trustees to make the change.

Beneficiaries are the people that are going to receive the money from a life insurance claim payout. You can choose to name people specifically, exclude people or leave it open for any ‘potential Beneficiary’.

A potential Beneficiary is usually 

• Widow or widower
• Civil Partner
• Children or other direct descendants
• Parents, brothers or sisters
• Anyone entitled under the will or intestacy
• Any charity or other person specifically named in written communication to the Trustees

The Trustees that you have chosen will then select the person(s) from the list that they feel should receive the money.

Trusts are immensely important for cohabiting partners because without one the money won’t go to your partner! The money from a life insurance claim will go to your next of kin. This means that if you have set up single life insurance policies to help pay off your mortgage, you have to hope that your next of kin will let your partner have the money.

You might think that this won’t happen, but it does and it is heartbreaking to witness.

Also, as a cohabiting person you only have up to £325,000 before there is inheritance due on your estate. This can sometimes be higher if you own a property. Keep an eye on the value of your property, it doesn’t take much for markets to change and you suddenly be into IHT levels.

There is another quite macabre situation to mention, but it’s important to do so. If you are cohabiting and have a joint life first death insurance policy (the one usually done for mortgages), that isn’t in Trust, if you both die at the same time they will assume that the older one of you died first. This means that the money for the policy will go to older policyholder’s family to control. This might be fine for you, but have a think about it.

Watch out!

With life insurance Trusts it will ask you if you want to ‘retain the terminal illness benefit’ or gift it to the Beneficiary.

Most people will probably want to choose to retain this, but there is an exception!

The reason that you would usually suggest to retain a terminal illness claim is that it means the life insurance pays out before you die, if you are terminally ill, so that you can be as comfortable as possible in your final days. You want to make sure that the money is there to help you with the likely care needs that you will face.

There is a however a huge exception. This is if you are arranging the life insurance for inheritance tax or gift planning. The life insurance for these policies will be set up to specifically help your loved ones to pay any IHT due and release your estate.

In most situations like this you should make sure that the terminal illness benefit is gifted to the Trust. If not, the claim will come to you and increase the value of your estate, completely defeating the whole point of setting the life insurance up. 

You should also be careful when choosing your Beneficiaries too for IHT and gift planning. You don’t usually want the life insurance claim to payout to your partner as a default potential Beneficiary, as this will again likely increase the value of the estate. So, really keep eye on any suggestion of leaving the Trust open for ‘Potential Beneficiaries’ as this won’t work if your partner is still alive.

How do I put my Life Insurance into Trust?

A lot of the time you can arrange a Trust when you apply for Life Insurance online and it is all done there and then for you. Perfect.

If you already have a life insurance policy simply contact your insurer, speak with your original adviser or contact us and we will send the Trust forms out to you.

Our award winning advisers are here to help you make the right decisions when arranging life insurance, to give you peace of mind that the policy you are paying for is going to do what you want it to do.