Life insurance and trusts

What is a trust?

A trust is a legal arrangement that enables you to set aside money or assets for a specific person, known as a beneficiary. These assets are then looked after by a trustee until the time comes for your beneficiary to receive them. For example, your partner could be the trustee for your children until they are old enough to be responsible for the money or assets themselves. 

Trusts can be used for many different assets, one of which is a life insurance policy - this is known as ‘writing life insurance in trust’. By putting your life insurance into a trust, you change the way in which your life insurance is paid out in the event of your death. This could be advantageous to your beneficiaries, allowing them to get the maximum benefit from your life insurance policy. However, placing a life insurance plan in trust is an irreversible act, so you need to carefully consider if this is the right choice for you before taking any action. You can either put your life insurance plan straight into trust as soon as you take out the policy, or place it in trust at a later date.

What are the advantages of writing life insurance in trust?

There are many advantages to writing your life insurance in trust by ensuring that your beneficiaries gain as much financial security as possible, as quickly as possible. Placing it in trust shouldn't increase your life insurance costs, so you can provide for your family and loved ones at no extra personal cost.

Avoiding Probate

The payout from your life insurance plan will be received more quickly when placed in trust, provided at least one trustee is still alive, because the insurer will not need to wait for probate. This is a legal proceeding in which the authority of your executor - the person who controls your estate - is confirmed. Probate often takes a long time, especially in cases where there is no will, so avoiding this process using a trust ensures your beneficiaries receive their payout much more quickly.

Side-Stepping Inheritance Tax

Another advantage to writing your life insurance in trust is that inheritance tax will not be charged on the payout, as the policy will not technically be part of your legal estate. By placing your life insurance in trust, after you die the proceeds from your policy will be paid directly to your beneficiaries, meaning that it will not be taken into account when calculating the inheritance tax charged to your estate. Placing assets such as your life insurance in trust may prevent your estate from being valued above the inheritance tax threshold, leaving more money for your beneficiaries. For more information, check out our guide on life insurance and tax.

Greater Control Over Your Policy

By writing your life insurance in trust, you can specify exactly how and when you want your life insurance proceeds to be distributed. You can add as many beneficiaries as you want, and can appoint trustees to look after any payout set aside for children under the age of 18. This ensures that your life insurance provides for your family and loved ones as well as it can, securing their financial stability.

What are the disadvantages of writing life insurance in trust?

By placing your life insurance plan in trust, you are moving it out of your legal estate and therefore giving up ownership and control over it. Though this action gives your beneficiaries greater benefits, such as avoiding probate and inheritance tax, you might not feel comfortable having less control over your life insurance policy. However, you can make yourself a trustee of your own life insurance in trust, which would give you some control of it while you are still alive.

Once you have written your life insurance in trust it is irreversible - you cannot then take it out of trust. Therefore, you need to be sure that a trust is the right option for you and your beneficiaries before taking action.

How do I write my life insurance in trust?

The process by which you can place your life insurance in trust varies between insurers and legal professionals. The best thing to do is to consult a solicitor or financial advisor personally, so that you know you are making the right choice for you and your beneficiaries. There is a basic process for writing your life insurance in trust, however, as outlined below:

1. Take out a life insurance policy
2. Ask for plan documentation from your insurer for placing your life insurance policy in trust
3. Choose the right type of trust for you, with advice from your insurer
4. Print out the trust deed of your choice
5. Complete all parts of the trust deed, making sure that your signature is witnessed. Your trustees must also sign in order to accept their role in your trust
6. Return your completed trust deed to your insurer

If you are unsure about any of the information on the trust deed, you should seek further information or advice. Once signed, the trust deed is a legally binding document, so it is essential that you know exactly what you are doing before you sign.