Should I write my life insurance in trust?
There are different factors to consider when arranging a life insurance policy, for example, whether you should have the policy written in trust.
Having a policy written in trust can help your family maximise your life insurance when you pass away. But what does it mean?
What does writing a policy in trust mean?
When you set up a trust, you are essentially handing over control of an asset or assets to trustees. It’s the job of these trustees to ensure that the assets held within that trust go to named beneficiaries at a specific time. Some people use trusts to set aside some cash for their children to receive when they reach 21.
You can do it with a life insurance policy too, with trustees. This could be your spouse or a lawyer. They would be responsible for making sure that the payout goes to the right people if you died during the term of the policy.
Reducing your Inheritance Tax bill
Your estate includes everything from your home to your vehicles and savings.
The issue of whether you pay Inheritance Tax or not depends on the value of your estate when you die. If your estate is worth more than a certain amount, then you will have to pay tax on the value of the estate above that threshold.
Importantly, any life insurance policy that is not written in trust is included in the calculation of your estate. As a result, a certain percentage of that payout may be taxed, rather than going to provide for your loved ones after you die.
This isn’t the case if your policy is written in trust as a policy in trust is viewed as being outside of your estate.
Writing a policy in trust can mean faster payout to your loved ones
If your policy is written in trust the payout is handled separately to the distribution of your estate. As your loved ones don’t need to wait for probate to be granted, the payout will go directly to your loved ones, and more swiftly to boot.
A benefit of writing your life insurance policy in trust is that you enjoy a little more control over who gets the money from your payout and when.
For example, the trustees can oversee the money until your children are old enough to manage it themselves.
How do I write my policy in trust?
Typically, insurers will offer to write your policy in trust when you take it out.
You may be able to transfer an existing life insurance policy into a trust, though you will need to enlist the services of a solicitor to do so. There will most likely be a fee involved, which will vary in size depending on the firm you use.
I've changed my mind!
It’s important to remember that writing a life insurance policy in trust is not something that can be reversed. You are effectively giving up control of the policy to the trustees - you can’t simply change your mind and ask them to hand it back.
It also means that you can’t amend the policy at all. There are certain points during your life when you might want to change some of the details of your life insurance policy. For example, if you move to a bigger property and take on a larger mortgage, you might want to increase the level of cover provided by your policy.
This is also not possible when your policy is written in trust. As a result, you should think carefully about whether the policy is going to be sufficient for the long term before you have it written in trust.
John Fitzsimons has been writing about money for more than a decade, as editor of the B2B magazine Mortgage Solutions and then personal finance website loveMONEY. Since going freelance, he has written for the likes of the Sunday Times, Forbes, the Mirror, the Sun, and Moneywise.
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