Should Your Life Insurance Policy Be Written In Trust?
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By Michael Challiner
According to one of the largest UK life insurance companies, just 1% of life policies are written in trust. That is disgraceful and reflects poorly on the financial industry.
If your life insurance policy is Written in Trust then, in the event of a claim, the insurance company pays out directly to the beneficiaries you name on the policy. The significance of this is easily missed.
It means that if the policy is Written in Trust, the proceeds from the policy never form part of your legal estate and are not subject to Inheritance Tax. The importance of this is illustrated by the following figures:
Take Mr A. He’s a widower and wants to leave everything equally to his two sons. He owns his home which is currently worth 245,000 with a 10,000 outstanding mortgage. His investments are valued at 52,000 and his car and other chattels are worth 18,000. He also owns a life insurance policy for 100,000 which is not written in trust. We assume that the costs of administering his estate and obtaining probate would be 5,000.
If Mr A were to die now, his estate would be worth 400,000 less Inheritance Tax. Inheritance Tax is currently levied at 40% on the value of his estate over and above 275,000 that means that the taxman will walk off with 50,000 and his sons would each receive 175,000.
Now lets assume exactly the same figures except that in this case the life insurance policy is Written in Trust with Mr A’s sons as equal beneficiaries. Because the life insurance company pays out directly to his sons, they each receive 50,000 straight away and non of the money is included in Mr A’s estate. This means that his estate is now worth 300,000 and the taxman can only walk away with 10,000. Each of his sons receives 20,000 more and tax-free!
So simply by signing a few forms, Mr A saves 40,000 tax!
Is there a catch? No all the documentation is standard and is provided totally free of charge by the life insurance company. Your broker through whom you buy the policy, should complete the documentation for you, again free of charge. All you have to do is give the details of the beneficiaries to the broker and sign the form. Solicitors are not required. In the event of a claim, the life insurance company then has to pay out directly to the beneficiaries. Job done! Poor Mr Taxman!
Even if your policy is designed to repay a mortgage, it should be Written in Trust for your partner. Then, rather than your estate receiving the money and using it pay off the mortgage, the money can be paid directly to your partner. This saves legal delays, solicitor’s and probate fees and loads of hassle. Your partner can then use the money to personally pay off the mortgage. Whether this also saves you Inheritance tax will depend on the value of your estate and how you have structured your Will.
So we believe that a life insurance policy Written I Trust is a win win situation. And there aren’t many of those around these days! We can’t see any drawbacks.
Bye the way, no matter what you decide to do, always ensure that you have an up-to-date Will.
About the Author: Express Life Insurance specialise in
life insurance quotes uk
but also offer both
critical illness cover
and life assurance policies.