Should I place my life insurance policy into a trust?

There are several reasons to consider putting your life insurance policy in a trust. 

 

Inheritance tax. If you have a life insurance policy but don’t put it in trust Inheritance Tax (IHT) could apply at 40%. 

 

Access to funds for your loved ones. Your family could access money from your life insurance money more quickly outside the probate process. 

 

Protection from debts against your estate. If you have debts, a life insurance payment doesn’t pay them automatically. 

 

Things you own such as property, land, savings and insurance policies are all assets. Together they make up your estate, which has a value. You can name people in your Will to benefit from your estate when you die. However, your executors must pay IHT before sharing out your estate as you would wish. 

 

A trust is a legal arrangement that moves your assets into the hands of one or more people you trust. Your trustees look after the assets when you die and divide them between your beneficiaries. You can choose family members and friends over 18 to oversee your trust or appoint legal professionals as trustees. You can choose the same people as both trustees and beneficiaries. You can name yourself as a trustee to keep some control, but all trustees must agree to any decisions. 

 

If you set up a trust for your life insurance your trustee legally owns your life insurance cover. They must have the deed for the trust to claim the life insurance payment when you die. This confirms the terms of the trust to make sure they follow your wishes. Once you’ve put the policy and trust in place you can’t usually change the arrangement. 

 

If the value of your estate is above the IHT threshold your life insurance payment is taxable. Putting your life insurance cover in trust means the policy isn’t part of your estate, so IHT doesn’t apply. 

 

You can choose your trustees and beneficiaries and control who receives a share of the payment. If your life insurance plan is in a trust, the payment goes to them, rather than to pay your debts. Your trustees only need your death certificate to claim the payment. There’s no need to wait for the probate process, which is sometimes lengthy. 

 

The most common types of trust are: 

 

The main difference is the amount of flexibility each type of trust allows. A flexible or discretionary trust could allow you to add further beneficiaries, for example. In contrast, you can’t later change an absolute trust. 

 

A discretionary trust allows you to name multiple possible beneficiaries, leaving your trustees to allocate payment later. You should check they are willing to take on this responsibility. As an alternative, people sometimes choose a professional to act as a trustee for a fee. You can write a letter of wishes to guide your trustees. Alternatively, a flexible trust allows you to name who should benefit and how to share the money. 

 

When you set up a life insurance plan, you’ll probably discuss the option of writing the policy in trust. However, you can also decide to put your life insurance into trust later.