Why putting your life insurance in trust might be the best thing you can do for your loved ones
3 min read
Life insurance provides financial protection for your loved ones in the event of your death. Here are answers to frequently asked questions on how your loved ones can get the maximum benefit from your life cover.
Is a life insurance payout tax-free?
Ordinarily yes – except for Inheritance Tax. Receiving a large life insurance payout can push you over the threshold and land you with a big bill. Find out more about the Inheritance Tax threshold.
How can my family maximise the benefits of my life insurance?
By writing the life insurance policy ‘in trust’. This is a legal arrangement that lets you switch ownership of a life insurance policy (or any other asset), from you, the policyholder, to the trust. You appoint a trustee, someone you can count on, to look after the arrangement and ensure the assets go to the right people.
How does a trust work?
Inheritance Tax is charged on your ‘estate’. This is the property and other assets your loved ones will inherit. A trust keeps the eventual insurance payout outside your estate, and so free from Inheritance Tax.
Are there any other benefits to setting up a trust for my insurance policy?
Yes! Writing your life insurance policy in trust makes things easier for your loved ones in that they won’t have to go through probate to access the money.
Probate is the legal process of winding up a person’s estate after they die. It usually takes around six months, but can take up to a year. Any inheritance will be frozen until it's done.
Writing your life insurance policy in trust avoids this delay. The money will be distributed the way you want it to be. It will also be much quicker, as it does not need to be subject to the same tax and legal proceedings as the assets in your estate.
How easy is it to put my life insurance policy in trust?
Usually, your insurer will ask you if you want your policy written in trust. You can move it into a trust later, though you may need to pay a solicitor to arrange that.
Remember, once you put a life insurance policy into a trust, it’s under the control of the trustees. It’s not typically possible to make any changes to the policy from that point.
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Laura Miller is a freelance financial and business journalist with over a decade's experience, including lately covering the impact of coronavirus on business and jobs for ITV News.