Writing your life insurance policy in trust
When you're buying a life insurance policy, you have a variety of things to consider. To make the most out of your policy, you need to understand what options are available to you. While you're considering different policy types and comparing premiums, don't forget to consider the option of writing your life insurance in trust.
This is the process of writing your life insurance policy so that it is held in a trust, which can offer you a number of advantages. For example, it can mean that the life insurance policy pays out more quickly and that you don’t have to pay tax on some or all of the policy payout.
What Is a Trust?
A trust is a method of managing assets. A person (the settlor) pays into a trust, which is then managed by someone else (the trustee), and the person it is set up to benefit (the beneficiary) is able to withdraw the assets when the trustee allows them to do so.
What Types of Life Insurance Trusts Are There?
There are three types of life insurance trusts you can use, each with different rules on what can be changed/decided at a later date in relation to the trust:
- Fixed Life Insurance Trusts: Also known as ‘bare trusts’ or ‘absolute trusts’, with a fixed life insurance trust everything is set in stone from the outset. You name the beneficiaries and how the benefit will be split between them, and cannot alter these decisions afterwards.
- Flexible Life Insurance Trusts: These allow you to add potential future beneficiaries (such as grandchildren not yet born). They give the trustees the power to amend the beneficiaries, and the way the benefit is split between them, as they see fit to meet your wishes. These are also known as ‘power of appointment’ trusts.
- Discretionary Life Insurance Trusts: With a discretionary trust, everything is left up to the trustees. There are no default beneficiaries. Instead the settlor puts forward potential beneficiaries and leaves everything up to the trustees’ discretion, including the addition of potential future beneficiaries.
Who Should You Write Life Insurance in Trust?
Writing life insurance in trust offers a range of advantages, but there are situations in which it isn’t the best option. One such situation is if you have a joint life insurance policy with your spouse or partner. Joint policies automatically pays out to the surviving partner with no income tax payable as it is classed as a transfer of assets. Thus removing the tax advantages of having a policy in trust.
What Are the Drawbacks?
The main drawback to consider when writing life insurance into trust is that it is the trustee(s) rather than you who has control of the trust once it has been created. You also cannot change it or make alterations at a later date so it’s important to be sure about who you want the beneficiaries and trustees to be at the outset.
Does It Cost More to Write Life Insurance in Trust?
The policy won’t cost more, but you may have to pay a little extra to get some legal advice on setting up the trust. Some insurers will also allow you to transfer an existing life insurance policy to a trust if you already have life insurance but have only just made the decision to put it in a trust.
Should You Talk to a Legal Advisor?
Yes. While it's not essential that you speak to a solicitor about writing a life insurance in trust, it is strongly recommended. Many life insurance providers will ask that you do so if you want to transfer an existing policy to a trust, but it's also a good idea for new policies.
Talking to an independent legal advisor will help you make sure that you understand everything that setting up a trust entails. They can also advise you on the best way to arrange things so that you're happy with what will happen to your life insurance payout.