Benefits of putting your life insurance in 'trust'

February 18, 2022

You can specifically take out a life insurance policy to leave a cash lump sum legacy to a beneficiary in your Will and can ring-fence those insurance funds by having your policy ‘written in trust’.

Here’s what you should know about putting life insurance in trust, including the advantages and disadvantages of setting up a life insurance trust.

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What is a life insurance trust?

A life insurance trust is a legal binding arrangement, typically set up by a Will writing professional, to ringfence (protect and earmark) your life insurance policy proceeds as a tax-free inheritance for your loved ones or dependants.

The details of your life insurance policy will be clearly written into your Will (as being ‘in trust’) and will confirm:

  • that you are the ‘settlor’ (the policy owner who is setting up the trust)
  • the name/s of your chosen and appointed trustee/s (who will be in charge of the trust)
  • the name of your chosen trust beneficiary/ies (who will receive the insurance payout)

The ‘trustee’ you choose to appoint can be a relative, friend, a company or legal professional and you can optionally have one or more life insurance trustees.

It is the life insurance trustee’s responsibility to make sure the policy proceeds (payout) are transferred to the beneficiary named in your Will.

When making a Will and setting up a trust fund for children, many policyholders will usually specify that the trust funds cannot be released until a child reaches a certain age - typically 18, 21 or 25.

If you’d like to know more about writing a life insurance policy in trust, contact Wills Services and one of their professional advisors will happily call you back to answer any trust and probate insurance queries you may have.

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Who is the beneficiary of life insurance?

A ‘beneficiary’ is the person who will benefit from a trust and who you have specifically nominated to inherit the policy funds in your Will.

A beneficiary for life insurance is usually a spouse, civil or common-law partner, a child, close relative or friend, or a charity.

Read more: A guide to naming life insurance beneficiaries

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Advantages of putting life insurance in trust

The main advantages of putting life insurance in a trust are:

  • It’s tax-free: the proceeds from a life insurance policy in trust will not be taxed as the funds are not included as part of your ‘estate’ meaning a whopping 40% Inheritance Tax (IHT) will NOT be payable on the policy proceeds, should your estate be worth more than £325,000 (the IHT threshold).
  • It’s fast: the beneficiary will usually receive a payout more promptly and usually shortly after the Death Certificate is issued. The traditional inheritance route means a beneficiary would have to wait for Probate before inheritance funds are released and this can take several months or for more complex estates, longer.
  • It’s concrete: you can make absolutely certain that the policy proceeds will go to the person or organisation you have chosen and will not be used to pay off any debts

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Disadvantages of putting life insurance in trust

It’s a real struggle to think of any disadvantages of putting life insurance in trust, especially if your estate will be worth more than £325k and subject to IHT.

However, there are a few minor disadvantages such as:

  • It’s irrevocable: trust owned life insurance is very difficult to amend or cancel once it’s been set up, so make sure you are 100% certain this is what you want before setting up an irrevocable life insurance trust.
  • Its age: if you die within 7 years of setting up a trust being set up or if the proceeds are kept in the trust for more than 10 years after the policyholder’s (settlor’s) death, the trust proceeds can still be subject to IHT.
  • Its trustees: you must ensure that you keep in touch with the trustee of a life insurance policy and update their contact details where necessary so that a trustee can easily be traced in the event of a claim being made

Wills Services are a professional and affordable online Will, Power of Attorney, Guardianship and trust fund service that can help you write a professional, legal-binding Will, in the comfort of your own home, for as little as £29.99.

If you’d like to know more about writing life insurance in trust, we recommend you contact Wills.Services using their online contact form and one of their professional advisors will call you back to discuss your options.

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