When you take out life insurance cover, it’s inevitably to provide your family with a degree of financial security in the event of your death. But while you’ll undoubtedly have best intentions in mind when taking out life insurance and give sufficient care to ensuring that your loved ones are protected from the burden of mortgage payments, funeral expenses and other financial commitments going forward, failure to put your policy in trust could see any payouts delayed and/or eroded because of inheritance tax.
However, despite the numerous benefits of placing a policy in trust, only a small proportion of people who take out life insurance cover actually choose to do it.
Putting a policy in trust isn’t expensive and it needn’t be complicated, but it can make a huge difference to your family at what will be an extremely distressing period. It will ensure that the right money ends up in the right peoples’ hands at the right time.
When you take out a life insurance policy, you’ll be asked at some point in the process if you want to write your policy into trust. It’s free, but unfortunately, because many people are unaware of the benefits and don’t understand what it means, they often simply ignore it.
There are two main benefits to placing a life insurance policy in trust:
- Protects the payout from inheritance tax
By placing a policy in trust, you are effectively removing it from your estate. This means that it will not be subject to inheritance tax, which is currently payable at 40% on any part of an estate valued over £325,000. While you may not think your estate will exceed this figure, having just a house and a life insurance policy will often exceed this limit. Potentially, up to £4 in every £10 could end up in the taxman’s hands and not the hands of your family.
- Speeds up payment
Before the executors of your will can deal with your estate, they need to be granted probate. This is the official seal of approval which allows them to proceed. Until probate is satisfied, your family will not be able to claim the insurance money and as this process can take up to 12 months in some circumstances, the distress to them is amplified. Policies that have been placed in trust will often be paid out more quickly, as the insurance provider only needs a death certificate to proceed.
As we’ve already mentioned, placing a life insurance policy in trust should not cost you anything extra. It should be an option that you are given when taking the policy out. Furthermore, existing policies – if they aren’t already – can usually be placed in trust, but it’s always best to double check nonetheless.
Putting a life insurance policy in trust ultimately gives you more control. You can stipulate how you want the proceeds to be paid out. It might be that you want some of your insurance money to go to your children. If that’s the case you can ask the trustees to keep control until your children turn 18, or let them have the payout at another time you specify.
A trust is probably the best way to ensure the purpose for which you took out the Life insurance policy can be achieved. After all Life insurance pays out when you are not around so unless your instructions are clearly and legally documented (as in a trust arrangement) someone else and even worse, the tax man, may get their hands on your money.
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