Life insurance is an insurance policy that pays out if you die. When you take out a policy, it’s important to think about what will happen to the money when it’s paid out, with you no longer around. Who will receive it? How soon will it be paid out? Will it be taxed? These are all common questions.
One way of controlling what happens to the money paid out by your life insurance policy is by specifying it in your will. Another is by writing your life insurance into trust through your insurer – which could have some advantages over a will, depending on your circumstances and wishes. We’ll explore all of this below.
What is a life insurance trust?
A trust is a legal arrangement that keeps an asset – in this case, your life insurance policy – separate from the rest of your estate. You can set it up with your insurer. A life insurance trust involves:
- You – as the life insurance policyholder
- Your beneficiaries – the person or people you want to receive the life insurance lump sum if and when it’s paid out
- Your trustees – the person or people you want to look after your life insurance trust
How does a life insurance trust work?
The policyholder is the only person who can set up the trust. You can do so directly with your insurer either straight away, as soon as you buy a policy, or later on, if you decide to. Different types of trust include:
|In a ‘fixed’, ‘bare’ or ‘absolute’ trust, you decide who the beneficiaries of your life insurance are up front, and how the money should be split between them. These decisions are permanent; you can’t change them in the future.|
Power of appointment trust
|In a ‘flexible’ or ‘power of appointment’ trust, you name the beneficiaries of your life insurance and how the money should be split up front – but you can also name potential beneficiaries, like children or grandchildren who aren’t born yet. In this kind of trust, your trustees will have the power to amend the list of beneficiaries in line with your wishes.|
|Discretionary trust||In a ‘discretionary’ trust, you name only potential beneficiaries of your life insurance payout. If you die, who from these gets the money (and how much) is up to the discretion of the trustees.|
Benefits of writing your life insurance into trust
The money is paid out quickly
If your life insurance policy is in trust, it won’t have to go through probate (as long as there’s at least one surviving trustee), so your beneficiaries would get the money quickly. This is particularly useful if you dying would leave your family with a financial shortfall straight away – enabling them to pay for whatever’s needed in their circumstances without struggle. This could be the bills, a mortgage, or even your funeral.
The payout won’t be subject to inheritance tax
Putting life insurance in trust means it won’t be subject to inheritance tax if you die. This is because it won’t be considered part of your estate. Whether or not this benefit is relevant to you depends on the likely value of your estate when you die and who would inherit it.
You can choose where the money will go
Depending on the type of trust you set up, you can state who should receive the money and be sure that your wishes will be carried out if you die. This gives you true peace of mind that your life insurance will do what you want and need it to do for your loved ones.
What happens if I don’t put my life insurance into trust?
If you don’t put your life insurance into trust, it will be counted as part of your estate if you die. This means it would need to go through probate, which can slow things down and delay the payout being made. It also means it could be subject to inheritance tax, depending on the total value of your estate. Without a trust, who the money goes to depends on what’s specified in your will or the outcome of intestacy (if you don’t have a will).
Things to consider before putting your life insurance in trust
The main thing to bear in mind is that putting your life insurance into trust means sharing control of it with your trustees. So if you need to make any changes in the future – like changing a trustee, or changing or cancelling your policy – you’d need the agreement of all trustees to do so. This can sometimes get complicated, so it’s best to make sure it’s set up right from the start, as far as possible.
Putting your life insurance into trust might not be appropriate in every set of circumstances, so you should consider it carefully and seek legal advice if you need it. Most insurers have their own dedicated team to help you understand which trust option is best for you.
- A trust is legal arrangement put in place to control an asset (like life insurance)
- It keeps your life insurance separate from the rest of your estate
- It means the money is paid out quickly, as it won’t go through probate
- A trust arrangement should be considered carefully
- An adviser can help you work out the most suitable illness protection for you
- Whether a trust is appropriate for you depends on your circumstances