Should I write my life insurance in trust?
At ActiveQuote, we’re firm believers in planning for the unexpected and have written many articles on the benefits of life insurance.
Yet sadly, many of our customers don’t realise that, without taking certain steps, a life cover payout could incur unforeseen charges, leaving your beneficiaries with a shortfall in the expected sum received.
Writing your life insurance policy in trust helps to ensure that these costs are bypassed and the entire sum goes to your loved ones, as well as bringing other benefits. Read on to find out more!
What is life insurance?
Life insurance is a type of protection insurance that pays out a lump sum in the event of your death. It can be used in whichever way your named beneficiaries think best, such as to pay off a mortgage, meet household bills while they adjust to their loss or pay school or university tuition fees.
What is a trust?
A trust is a legal agreement protecting the people you want to benefit from your assets. Without writing your wishes in trust, other parties could make a claim on your estate; for example, any money you leave could be used to pay off outstanding debts, or long-lost relatives could come forward and contest your will.
Writing life cover in trust is a good idea for a number of reasons, including:
- Preventing any disputes about your wishes
- Avoiding inheritance tax
- Avoiding a lengthy probate process
What is inheritance tax?
Inheritance tax, known as IHT, is a tax paid on an estate worth over a certain amount. The current threshold is £325,000, which has remained the same since 2010/11, and the standard rate is 40%. This means that, should you pass away, your beneficiaries would be liable to pay a tax of 40% on all assets above £325,000.
HMRC figures show that in 2016/17, 4.6% of deaths in the UK resulted in a tax charge, with 28,100 estates paying IHT of £5.4bn. If your estate passes the threshold and you haven’t written your life cover in trust, almost half its value could end up going to the taxman rather than your loved ones.
What is probate?
Probate is the legal process by which a deceased person’s money, property and other assets are sorted out. The executors of a will need to apply for probate (known as ‘confirmation’ in Scotland). Once probate has been granted, it’s the job of the executors to gather assets - such as money in current or savings accounts and payouts from insurance policies - and ensure the beneficiaries named in a will receive the legacy left to them.
Probate can be a long and complex process; even where a will has been left, it’s not unusual for the probate process to take a year or longer in the UK. If life insurance is written in trust, however, it bypasses probate, meaning that your loved ones will benefit from the money sooner.
Being bereaved is hard enough emotionally, let alone having to deal with practical problems that could easily be avoided. Read our guide to why you need to talk to your loved ones about death, then find out more about life insurance myths and why financial planning in later life marriages is essential!