Should I write my life insurance in trust?
When arranging a life insurance policy, one important decision is whether to have the policy written in trust. This can have a significant impact on how your loved ones benefit from your policy after you pass away.
What is a trust?
A trust is a legal arrangement where you give control of an asset such as money, property, or a life insurance policy to one or more trustees. These trustees are responsible for managing the asset and ensuring it is passed on to the chosen beneficiaries at the right time. Trusts are often used to protect and direct how money is distributed, for example, ensuring children receive funds when they reach a certain age.
How does putting your life insurance in trust work?
When you write your life insurance policy in trust, you appoint trustees (such as your spouse, a family member, or a solicitor) to look after the policy. If you die during the term of the policy, the trustees are responsible for making sure the payout goes to the people you have chosen (the beneficiaries). This means you can specify exactly who receives the money and when, giving you more control over your legacy.
Benefits of writing your life insurance in trust
- Reduce your inheritance tax - Your estate includes everything you own, from your home to your savings. If your estate is worth more than the inheritance tax threshold, tax may be due on the amount above that limit. Importantly, if your life insurance policy is not written in trust, its payout is included in your estate and could be subject to inheritance tax. However, if your policy is written in trust, it is usually considered outside your estate, so the payout can go to your loved ones without being taxed.
- Faster payments - When a life insurance policy is written in trust, the payout is handled separately from the rest of your estate. This means your beneficiaries don’t have to wait for probate (or confirmation) to be granted, so they can receive the money more quickly at a time when they may need it most.
- Greater control - Writing your policy in trust gives you more control over who receives the payout and when. For example, you can arrange for trustees to hold the money until your children reach a certain age or milestone. This ensures your wishes are followed and your loved ones are protected.
Limitations of writing life insurance in trust
While there are clear benefits, there are also some important considerations:
- Once a policy is written in trust, you give up control of it to the trustees. You cannot simply change your mind and take the policy back.
- Insurers will generally not charge for putting a life policy into trust, but more complex trusts could involve legal fees, especially if you use a solicitor.
- Trusts can be complex, so it’s important to seek advice to ensure it’s the right option for you.
How do I write my policy in trust?
Most insurers offer the option to write your policy in trust when you take it out. If you want to transfer an existing policy into a trust, you’ll usually need to speak to your advisor for help.
Frequently asked questions about life insurance in trust
Can I remove a policy from a trust?
No, once a policy is written in trust, it cannot be reversed.
Who can be a trustee?
You can choose anyone you trust, such as a spouse, family member, friend, or solicitor.
How much does it cost to set up a trust for life insurance?
Some insurers offer this service for free, but if you use a solicitor, there may be a fee.
What happens if I don’t write my policy in trust?
The payout will form part of your estate and may be subject to inheritance tax and probate delays.
Will the trust affect my life insurance premiums?
No, writing your policy in trust does not affect the cost of your premiums.
