Life insurance trust

What is a life insurance trust?

Put simply, a life insurance trust ensures that the payout from a life insurance policy passes directly to the beneficiaries on the death of the life insured.

Most other types of trusts are entities that should only be entered into with a expert’s input – however, a life insurance trust is not a complex thing.    In fact,  most life insurance providers will provide basic trust documents for nothing on request - meaning that except in the most complicated situation - the trust can be added at no cost.

What is the correct terminology for a life insurance trust?  Within the life insurance industry when you put a life insurance policy into trust it is known as a ‘policy that is written in trust’ or ‘writing a life insurance in trust’

Life insurance trust basics

A trust has three parties:

• The Settlor - this is the life assured - the person on whom the life policy is based and the person putting the policy into trust
• The trustees - trustees oversee the trust dealings.  They have a duty to ensure that the trust is dealt with in a proper manner.  It's not a really arduous task in terms of a life insurance policy, they just have to sign the form and see the proceeds are paid on the Settlor's death
• The Beneficiary or Beneficiaries - the people to whom the proceeds will be paid

Why would I bother to have a life insurance trust?

Given it’s such a simple process (usually) to write a policy in trust, a surprising amount of people taking out a life insurance policy fail to write it into trust, missing the opportunity for a number of ways to make the policy more useful.

1. When a policy is written outside of a trust, the proceeds will normally become part of the deceased’s estate if a Will is involved.  If the proceeds are in the estate, probate will need to be granted before the executors can distribute the monies.  Grant of probate can take an extended amount of time, even in a simple estate. 

However if the policy is ‘in trust’ the proceeds can be paid directly to the beneficiaries by the life insurance provider, on receipt of a death certificate only.

Note: If the deceased dies without leaving a will (intestate) and the policy is not in trust, the problems and the time to resolve them will grow exponentially.

2. Having a policy in trust can assist in avoiding inheritance tax.  If the policy is not in trust, the proceeds will become part of the estate that is liable to inheritance tax – writing it in trust, takes it out of that calculation.
   
3. In fact the life insurance proceeds can be available quickly to help pay any inheritance tax payable on the rest of the estate (due within 6 months of the death) - or pay funeral cost, pay off debts etc.

The policy will be paid to your chosen beneficiaries – not to creditors

When to leave your life insurance out?

In 2006, the Chancellor introduced changes around trusts – at that time there was concern that life insurance trusts were also under attack.   Whilst the likelihood of the life insurance trust causing taxation is thought to occur under exceptional circumstances - e.g. taking out a policy when you have a terminal illness – we’re not qualified to give advice about tax or trusts - so if you need more help about trust’s meeting your needs, you’ll need to take professional advice.  You can also visit  HM Revenue & Customs website

Also, if the policy is being used to pay off the proceeds of a mortgage – it is probably not advisable to put the life insurance in trust.