How to write life insurance in trust

How to put a life insurance policy in trust?

Life insurance pays out a cash lump sum to your loved ones if you pass away during the term of your policy.

A trust is essentially a legal arrangement, where the trust takes ownership of certain assets including any outstanding debts. You appoint a trustee or trustees to oversee the trust. These could be family members, friends or perhaps a solicitor.

The job of the trustees is to ensure that the assets contained within the trust go to the named beneficiaries, such as a partner or children. In other words, the money goes where it is supposed to, rather than into the hands of the taxman.

Perhaps the greatest advantage of writing life insurance in trusts is that your partner will get the money quickly and with less paperwork, particularly if you're not married or in a civil partnership.

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What happens if life insurance isn’t in a trust?

The money goes to your estate and is distributed in line with your will. This involves what is called probate and it may take many weeks before the assets are distributed. If your estate is highly valuable it may be subject to inheritance tax.

Everyone in the 2024-25 tax year has a tax-free inheritance tax allowance of £325,000 – known as the nil-rate band. The allowance has remained the same since 2010-11.

The standard inheritance tax rate is 40% of anything in your estate over the £325,000 threshold.

• Find out more: Inheritance tax: thresholds, rates and who pays

Are life insurance payouts taxed?

Life insurance payouts are not subject to income tax or capital gains tax, so in most cases your family will receive the money in its entirety.

If you have a large estate and the life insurance payment takes the value of that over a certain threshold, it may, however, be subject to inheritance tax. Few households pay IHT (just 3.76% of all UK deaths in 2019-20), due to a personal allowance of £325,000 and the fact that couples can roll over each other’s allowance. However, the 40% inheritance tax rate means it can't be ignored.

When assets are placed within a trust, you effectively give up ownership of them. They are now under the management of the trustees, not you, and are no longer classed as being part of your estate.

This is a really important distinction. It means that should you die, the insurance policy will be handled separately to your actual estate, and so won't be subject to inheritance tax if your estate is valued above the tax threshold.

It means that your family will receive the full payout, without any tax deducted.

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What are the different types of trust I could use?

Trusts come in all shapes and sizes - and can range in complexity based on your wishes and what you want to use the trust for.

There are two main forms of trust: a bare trust and a discretionary trust.

• In a bare trust, the money is held by a trustee, and all of the proceeds should go to the person or people you nominate, when they turn 18 (or 16 in Scotland).
• A discretionary trust gives the trustee greater power to decide how much the beneficiaries get and how frequently they get the money, as well as any other conditions you put on it (such as when they are able to receive the money).

There are more options - such as a gift trust, split trusts and more. What you use will depend on the types of life insurance products you hold and what you want to use the trust for. It's best to seek professional advice if you have complex needs.

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Is it worth putting life insurance in trust?

There are three types of life insurance: term life insurance, whole-of-life insurance and family income benefit insurance, which all pay out in slightly different ways.

The main benefit of writing life insurance into trust means that your family will not need to go through the probate process – which is where your estate is divided up according to your wishes – in order to receive the insurance money.

Probatecan be a lengthy process, so having the policy written in trust cuts out delays and ensures your family receives the money much more quickly. Your family will be eligible for the payout just a few weeks after your death certificate has been issued. 

This can be vital after someone dies. If you rely on two incomes to meet mortgage repayments, for example, a long delay due to probate, lasting for six months or more, could have severe repercussions on your ability to repay your mortgage, and could even lead to repossession of your property.

Writing a life insurance policy into trust enables you to avoid this potential pitfall and ensure your loved ones get the benefits as soon as possible. 

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Why unmarried couples should consider a trust

If you're not married or in a civil partnership, and haven't named your partner in your will, you could risk leaving them with nothing.

Should you pass away, your assets would be divided according to intestacy rules, including any life insurance payouts, which could leave out your partner.

Writing a policy in trust, with your partner named as a beneficiary, will ensure they get the money.

Make sure that the trustees are people you'll easily be able to contact in future (and, ideally, aren't also beneficiaries). If you needed to change the trust – for instance, if you split up – you'll need the trustees involved.

Alternatively, you could consider taking out a joint life insurance policy that would protect your partner regardless of your marital status. 

• Find out more: Joint vs single life insurance – which is better?

How do you write a life insurance policy in trust?

The process of writing a life insurance policy in trust is very simple. Most insurers will offer it as an option when you initially take out the policy, and there should not be any extra charge for doing so.

A life insurance policy can be put into trust at any time. You can do it when the policy is first written, or at a later date – it's entirely up to you.

Transferring an existing life insurance policy into trust may involve the assistance of a financial adviser or solicitor, and so could incur some costs.

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Can I change my life insurance policy after it has been written in trust?

It's important to think carefully about what you want from your life insurance policy before having it written in trust.

That's because once it has been written in trust, it is no longer under your control: it has been handed over to the trustee or trustees. This is classed as an 'irrevocable act', and cannot be undone.

As a result, you need to make sure that your life insurance policy offers sufficient cover and that you are unlikely to need to change the policy in any way before you write it in trust.

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