How to write life insurance in trust

What does it mean to put a life insurance policy in trust?

Life insurance pays out a cash lump sum to your loved ones if you pass away during the term of your policy.

A trust is essentially a legal arrangement whereby the trust takes ownership of certain assets, including any outstanding debts. You appoint a trustee or trustees to oversee the trust. These could be family members, friends or perhaps a solicitor.

The job of the trustees is to ensure that the assets contained within the trust go to the named beneficiaries, such as a partner or children. In other words, the money goes where it is supposed to, rather than into the hands of the taxman.

Perhaps the greatest advantage of putting life insurance in a trust is that the beneficiaries will get the money quickly and with less paperwork, particularly if you're not married or in a civil partnership.

• Find out more: best UK life insurance quotes compared

Want to understand more about the different types of protection insurance products? Find out more about what is life insurance?

 Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of an insurer before committing to any financial products.

How do you put a life insurance policy in trust?

The process of writing a life insurance policy in trust is usually fairly straightforward. Most insurers will offer it as an option when you initially take out the policy, and there should not be any extra charge for doing so.

A life insurance policy can be put into trust at any time. You can do it when the policy is first written, or at a later date – it's entirely up to you.

Transferring an existing life insurance policy into trust may involve the assistance of a financial adviser or solicitor, and so could incur some costs.

• Find out more: What is over-50s life insurance?

What are the different types of trust I could use?

Trusts come in all shapes and sizes - and can range in complexity based on your wishes and what you want to use the trust for.

There are two main forms of trust: a bare trust and a discretionary trust.

• In a bare trust, the money is held by a trustee, and all of the proceeds should go to the person or people you nominate, when they turn 18 (or 16 in Scotland).
• A discretionary trust gives the trustee greater power to decide how much the beneficiaries get and how frequently they get the money, as well as any other conditions you put on it (such as when they are able to receive the money).

There are more options – such as a gift trust, split trusts and more. What you use will depend on the types of life insurance products you hold and what you want to use the trust for. It's best to seek professional financial advice if you have complex needs.

• Find out more: how to find a financial adviser

Is it worth putting life insurance in trust?

There are three types of life insurance: term life insurance, whole-of-life insurance and family income benefit insurance, which all pay out in slightly different ways.

Here are the key benefits of a life insurance policy in trust:

1. Get payouts quicker

Writing life insurance into trust means that your family will not need to go through the probate process – which is where your estate is divided up according to your wishes – in order to receive the insurance money.

Probate can be a lengthy process, so having the policy written in trust cuts out delays and ensures your family receives the money much more quickly. Your family will be eligible for the payout just a few weeks after your death certificate has been issued. 

This can be vital after someone dies. If you rely on two incomes to meet mortgage repayments, for example, a long delay due to probate could have severe repercussions on your ability to repay your mortgage.

2. Help with inheritance tax

Life insurance payouts are not subject to income tax or capital gains tax. However, if your estate – including the life insurance payout – is highly valuable, it may be subject to inheritance tax (IHT).

When assets are placed within a trust, you effectively give up ownership of them. They are now under the management of the trustees, not you, and are no longer classed as being part of your estate.

This is a really important distinction. It means that should you die, the insurance policy will be handled separately to your actual estate, and so won't be subject to inheritance tax if your estate is valued above the tax threshold.

It means that your family will receive the full life insurance payout, without any IHT deducted.

• Use our calculator to work out how much inheritance tax might be payable on your estate.

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Can I change my life insurance policy after it has been written in trust?

It's important to think carefully about what you want from your life insurance policy before having it written in trust.

That's because once it has been written in trust, it is no longer under your control: it has been handed over to the trustee or trustees. This is classed as an 'irrevocable act', and cannot be undone.

As a result, you need to make sure that your life insurance policy offers sufficient cover and that you are unlikely to need to change the policy in any way before you write it in trust.

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