Life insurance and trusts

Putting life insurance in trust is an effective way to protect your loved ones’ financial future. By placing your policy in a trust, you might reduce how much inheritance tax your beneficiaries would pay if you pass away unexpectedly.

Let’s find out what it means to hold life insurance in trust.

  • Putting life insurance in trust transfers control of your policy to someone else, such as a spouse, child, or trusted family member – called a trustee.

    Life insurance in trust could protect your policy payout from inheritance tax. This can help your beneficiaries receive more of the lump sum, following a successful claim.

    A trust separates your policy from the rest of your estate. So, your loved ones would pay less inheritance tax, or even none, on any payout they claim and receive. Plus, any payout may not require ‘probate’ either, meaning they could receive the money faster.

    How does putting life insurance in trust work?

    There can be several options when putting your life insurance in a trust:

    Discretionary trust

    Your trustees have the choice of how to spend your inheritance after you pass away. They can also select who receives what.

    Flexible trust

    You decide who receives any payouts. You can also change the policy in future, such as changing benefactors, for example.

    Survivor’s Discretionary trust

    Your partner is the sole benefactor of your trust. This is a form of joint life insurance and entitles your partner to all your inheritance.

    Absolute trust

    You decide who receives your trust and anyone can’t change or challenge this.

    Split trust

    You can choose to combine potential payouts from your life insurance and critical illness cover if you have them. Any payout is split. This allows you to receive payouts from critical illness cover as soon as you are diagnosed, while still protecting your life insurance for the future.

    You can select to make your trustee and benefactors the same people. This means that those that control the payout also stand to benefit from it. However, it might be a good idea to make sure at least one of the trustees is someone other than a benefactor – like a legal professional.

  • Benefits to holding life insurance in trust include:

    • Your choice. You can select how to distribute your estate, and to whom. You can also choose who manages the process.
    • Tax wrapper. By placing your life insurance in a trust, you can protect any payout from inheritance tax. Separating the policy from counting towards your estate means your loved ones could pay less tax, or even none, on any successful claim.
    • Faster payout. Most trust policies are not subject to probate. This usually means successful payouts aren’t tied up in estate proceedings. Your loved ones might need this money to support them when you’re gone, so a relatively fast payout could be a relief.
  • Though placing your life insurance in a trust can be beneficial, there are some things to consider before you do:

    • It can be restrictive. Trusts are legal frameworks and some types do not allow changes once you sign the policy. Some people might find this restrictive.
    • Changes could invalidate the policy. If you do want to change the policy in future, doing so may invalidate the terms of your agreement. This depends on the type of trust you have.
    • It could be divisive. Selecting particular people to be your trustees might pose difficulties for your loved ones.
  • You have the choice of who to select as your trustees and beneficiaries. It’s an important decision, as these people control your policy, benefit from payouts, and may be able to make changes to it in future. You could choose loved ones, like a spouse or family member. Or you could select an organisation or professional, like a lawyer.

    Potential beneficiaries include:

    • Your partner or spouse.
    • Children, grandchildren, or stepchildren.
    • Wider family members like cousins, aunts, or uncles.
    • Friends.
    • An organisation or charity.
An image of a couple holding hands.

Frequently asked questions

  • You can contact a legal professional to discuss putting your life insurance into a trust. You’ll need their guidance to set up a trust deed. This is a document that outlines the terms of the trust, who the trustees are and the beneficiaries of your policy.

    If you have yet to open a life insurance policy, you may be able to put it into trust straight away as part of your application.

  • In life insurance, there’s no ‘best’ option. It’s important to choose an approach that works for you and your loved ones. This could mean keeping your life insurance policy in your legal control, or passing it on to a chosen other while you’re still alive. Each one comes with its own features and things to consider.

  • You may be able to change the benefactors on your trust, depending on the type of trust agreement you have. Some allow for changes, while others do not. It can cost to change the terms of the agreement, and you’ll need the help of a legal professional.

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