For most people, the purpose of taking out life insurance is to give your loved ones financial security upon your death. A way of looking after them when you’re no longer around to provide for them.
In doing so, you’ll want to make sure that the policy is arranged so that as much as possible of the money generated from the policy goes to your loved ones. It’s all about maximising the payout and making sure it goes to the right person or people.
How do you do that?
Well placing your life insurance in a trust is one option – it is estimated that only 6% of life insurance policies in the UK are arranged this way. This is surprising, especially when you look at what Life Insurance In Trust is and the benefits of this approach.
Putting A Policy In Trust
A trust, in general terms, is a simple arrangement where you take an asset (in this case life insurance) out of your estate (your money, property and possessions) and gift it to someone (the ‘beneficiary’).
There can also be multiple people that the payout is shared between. The trust is then normally looked after by a ‘Trustee’ until you die, and the benefit is then paid directly to the beneficiary/beneficiaries.
When it comes to life insurance, your insurance broker can arrange for the policy to be placed in a trust. This normally involves a solicitor managing the process.
Your first decision will be who to set up as a Trustee.
This could be a solicitor, a named person at your insurance brokerage or a close family friend. It should be someone that you completely trust and someone who has your best interests at heart.
They will then control your trust until you die, and they are responsible for executing your wishes and making sure that the money goes to the person or people that you want it to. It is also sensible to choose someone that you believe will outlive you.
There are two main types of trust that life insurance policies can be placed into…
Absolute Trusts – these tend to be fixed, and as such are hard to make any changes to the beneficiaries or their share of the trust once it is set up.
Discretionary Trusts – these are a bit more flexible. You don’t have to decide right away who will benefit, what they will receive or when they will receive it. You can also add other trustees to a discretionary trust once it has been set up.
Reasons To Put A Policy In Trust
So why would you put your life insurance in a trust?
Here are a few scenarios where a policy being placed in trust could be a good fit…
Potential Inheritance Tax Reduction
The main reason is to avoid inheritance tax. Normally a life insurance policy would pay out to your estate upon your death and would count towards the overall value of your estate. There is a threshold, currently £325,000, after which you pay 40% tax on it.
If you hit this threshold, the amount of money that goes to your loved ones is lowered because of the extra tax paid. The amount of tax you’d have to pay does also depend on a few factors such as whether you are single or in a couple, but as you can see, the inheritance tax can become a significant amount.
Having your life insurance in a trust means the full value of the payout goes directly to the person or people you have chosen, and it doesn’t count towards the value of your estate.
They get the full value of the policy without any tax-lowering the amount. This also means that your combined assets are less likely to hit the tax threshold, which protects the value of the rest of your estate.
Speed Of Payout
Another good reason to put your life insurance in a trust is that payouts are often much faster. When you die there is a legal process called probate, where all of your financial loose ends are tied up. Probate can be a lengthy process, often months if not years.
The process also depends on whether you have a will or not. In cases without a will, there can be legal challenges from members of the family who believe they are due a share of the estate and such arguments can take a long time to resolve legally.
In the case of a trust, there are clear instructions about who the money should go to and it bypasses probate as there can be no claim to it by anyone else other than those beneficiaries listed in the trust.
This can be especially handy if you intend your life insurance policy to partially or fully pay for your funeral or if the funds are intended to pay off your mortgage.
What To Bear In Mind When Putting Policies In Trust
It’s important to think carefully before you decide to put your life insurance policy in a trust as there can be some disadvantages to doing so.
The main one is control – it can be difficult to make changes to the trust, such as changing your mind about who should benefit. This is because you assign control of that asset to someone else (the Trustee) and those decisions are taken out of your hands.
You also need to be able to trust the Trustee, because they could potentially make changes to the trust without your knowledge or approval. This is especially the case when the trust is discretionary. Should you pick the wrong person to trust, this can become a major concern.
As with all important financial decisions, it’s wise to speak to a trusted insurance broker to find the best way possible to deal with your life insurance and whether it should go into a trust or not. Here at Apex, we can talk you through the various considerations you’ll need to include in your decisions such as bringing in existing life insurance policies, how best to deal with a joint insurance policy, and also how to pick the right Trustee to look after the trust.
Why not give us a call today to discuss the right options for you? We can talk about your wishes and give you transparent advice on the best way forward for you and your loved ones.