6 costly mistakes to avoid when putting life insurance in trust

Life insurance can help loved ones cover an inheritance tax (IHT) bill after you die. But our survey found that just 14% of Which? members with cover have put their policy in trust – a step that can shield the payout from IHT.

The legal arrangement means that any lump sum doesn't count as part of your estate, so beneficiaries receive the full payout and can settle the bill more quickly. But get it wrong, and you risk locking in unsuitable terms or delaying payment.

With six months until unspent pensions fall within the IHT net, we explain the benefits of putting life insurance in trust and the costly mistakes to avoid when doing it.

Please note that this article is for information purposes only and doesn't constitute advice. Please refer to the particular T&Cs of an insurer before committing to any financial products.  

Should you buy life insurance to help with IHT?

Life insurance can pay out a lump sum to loved ones when you die. Putting life insurance in trust involves appointing trustees – such as family, friends or a solicitor – to become the legal owners of the policy and manage the payout for your chosen beneficiaries. 

The policy in trust no longer counts as part of your estate, so the payout should be free of inheritance tax. 

Putting life insurance in trust can also help loved ones pay an IHT bill sooner. The payout can be made to trustees without waiting for probate (known as confirmation in Scotland), potentially speeding up access to the money.

Despite the benefits, 78% of Which? members don't have a life insurance policy, and only 14% of those who do have it written in a trust. 45% of Which? members who did take that step said that the main reason they did so was to make sure the payout isn’t counted as part of their estate for inheritance tax.

Our findings are based on combined results of online surveys of 2,111 Which? Connect panel members, conducted in September and October 2026. 

• Find out more: How to write life insurance in trust

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6 mistakes to avoid when putting life insurance in trust

Although there are advantages to putting life insurance in trust, there are also some potential pitfalls to watch out for:

1. Assuming any life insurance policy will do

You can put most types of life insurance in trust, but if you want a payout whenever you die to help cover an inheritance tax bill, a whole-of-life policy is generally the most suitable option. It covers you for life and pays out when you die, provided you keep up with the premiums.

Term life insurance only pays out if you die within the policy term, which can range from five to 70 years. If you outlive it, there’s no payout – and your estate will need to find another way to cover any IHT bill.

Read our guide to weigh up which type of life insurance policy is right for you.

2. Choosing the wrong type of trust

One of the biggest selling points of putting life insurance in trust is that it gives you more control over who receives the final payout and who will manage it on your behalf. 

There are several types of trust, but the two main options are bare trusts and discretionary trusts. 

With a bare trust, the money goes to your nominated beneficiaries when they turn 18 (or 16 in Scotland). A discretionary trust gives trustees more flexibility to decide who gets what, when and under what conditions.

But choose carefully: a bare trust generally locks in your beneficiaries, and you can't normally change them once the trust has been set up. A discretionary trust offers more flexibility over who ultimately receives the money, although any changes must be allowed under the trust's terms.

3. Forgetting an unmarried partner

Don't assume your significant other will get anything after you're gone. If you’re not married or in a civil partnership, your partner won’t automatically inherit under intestacy rules if you die without a will.

Writing life insurance in trust and naming your partner as a beneficiary can help ensure they receive the payout. 

A joint life insurance policy is another option for providing for a surviving partner, regardless of marital status. However, these policies usually pay out only once, on the first death.

• Find out more: Joint vs single life insurance: which is best? 

4. Never reviewing your policy in trust

Our survey found that 39% have never reviewed their trust policy, but a lot can happen during the term of life insurance cover. You may have got married, divorced, had children, or even become a grandparent. 

As long as the rules of the trust allow it, you should therefore regularly assess and update the list of beneficiaries if your wishes and circumstances change.

• Find out more: Best life insurance

5. Appointing unreliable trustees

Make sure that the trustees are people you'll easily be able to contact in future (and, ideally, aren't also beneficiaries). 

If you needed to change the trust – for instance, if you split up with your spouse – you'll need the trustees involved.

Choosing the right trustees matters. They must understand their duties, keep records and, with discretionary trusts, decide who gets what. If they lack time or experience, fall out, have conflicts of interest or become unreachable, payouts can stall.

With a large sum at stake, family tensions can flare, turning a trust into a source of conflict rather than protection.

6. Failing to seek professional advice

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. 

The process is usually straightforward, and your provider can usually help set up a trust when you take out the policy.

However, it's always worth seeking specialist advice to ensure everything is set up correctly. Transferring an existing policy into trust can also have tax implications, so it's important to check these before going ahead.

• Find out more: How life insurance works