If you’re setting up life insurance, you may have heard the phrase “putting your policy in trust.” But what does that mean, and why does it matter?
In this article, we’ll explain what it means to put life insurance in trust, how it works, and the key benefits, from faster payouts to potential inheritance tax savings. If you’re wondering whether it’s the right move for you, we’ll help you decide.
In 2024, UK protection insurance providers reached a record milestone, paying out a combined total of £8 billion in claims, according to new data from the Association of British Insurers (ABI)and Group Risk Development (GRiD). The figures highlight the crucial role that life insurance, income protection, and critical illness cover play in supporting individuals and families during life’s most difficult moments.
What is a life insurance trust?
A trust is a legal arrangement that allows you to appoint someone (a trustee) to manage your life insurance policy and ensure the payout goes to the right people (your beneficiaries) when you die.
Instead of the money from your policy becoming part of your estate and going through probate, it is paid directly to your chosen beneficiaries through the trust. This can make a big difference in how quickly and tax-efficiently your loved ones receive the money.
How does it work?
When you take out a life insurance policy, you can ask for it to be written in trust. This means:
- You name your beneficiaries – who you want the money to go to
- You appoint trustees – people you trust to manage the payout and ensure it goes where intended
- The payout bypasses your estate, so it doesn’t get tied up in probate or used to pay off debts
This is all arranged at the point the policy is set up, or in some cases, after the fact, using a deed of trust. Most insurers offer standard trust forms to simplify the process.
What are the benefits of putting life insurance in trust?
Here are some of the main advantages of writing your policy in trust:
1. Faster payouts
Money in a trust does not require probate. This means your loved ones could receive the payout in weeks instead of months, which is crucial for covering mortgage payments or living costs.
2. Potential inheritance tax savings
Life insurance paid into your estate could be subject to an inheritance tax of 40% if your estate exceeds the £325,000 tax-free threshold. By writing the policy in trust, the money is kept outside of your estate and may not be subject to tax.
3. Greater control over who gets the money
You choose the beneficiaries and trustees. That means you have more say over who benefits from your policy and how the funds are managed, especially if your children are still under 18 or if your circumstances are complex.
4. Avoiding disputes
Because the trust is a legally binding document, it reduces the risk of your life insurance payout being contested or delayed by family disagreements or challenges to your will.
When should you put life insurance in trust?
Writing your policy in trust can be especially useful if:
- You want to protect your beneficiaries from delays or tax
- You’re unmarried and want to ensure your partner receives the money
- You want to provide for children or other dependents
- You have a larger estate and need to reduce potential inheritance tax liability
- You want to retain control over how the money is distributed
It’s also worth noting that trusts are typically free to set up and offered by most major UK life insurance providers.
Types of trusts
There are a few common types of trusts used for life insurance:
1. Bare trust
You name fixed beneficiaries, and they automatically receive the payout when you pass away. Tax-efficient and straightforward, but it offers less flexibility.
2. Discretionary trust
You list a group of potential beneficiaries (such as children or future grandchildren), but the trustees decide who receives what. More flexible, often used for complex family situations.
3. Flexible trust
A mix between a bare and discretionary trust, giving you more control over who should benefit and how much they should receive.
Choosing the right type depends on your situation, family structure, and long-term goals. A financial adviser can help you choose the right trust for your needs.
FAQs
Is it too late to put my life insurance in trust if I already have a policy?
Not necessarily. Some providers allow you to assign an existing policy into trust using a deed of trust. Speak to your insurer or adviser to check what’s possible.
Do I still own my policy if it is held in trust?
You relinquish legal ownership when you place a policy in trust, but this is often beneficial for tax planning purposes. The trustees manage the policy according to your wishes.
Who should I choose as my trustees?
Ideally, people you trust to act in the best interests of your beneficiaries, often a family member, close friend or your solicitor.
Can I change the trust later?
It depends on the type of trust. Some are irrevocable, meaning once set, they can’t be changed. Others offer more flexibility. Always get professional advice before proceeding.
Does setting up a trust incur any costs?
Most insurers provide trust forms free of charge when you take out a policy. Legal advice may involve a cost, but many people set up simple trusts without needing a solicitor.
Conclusion
Placing life insurance in trust is a straightforward yet powerful way to ensure your policy payout reaches the intended beneficiaries quickly, efficiently, and tax-effectively. Whether you’re protecting your children, your partner, or your estate, establishing a trust can provide greater control and peace of mind.
Before making any decisions, it’s worth speaking to a protection adviser who can explain how a trust could benefit your specific situation and help you get it set up correctly.
