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Benefits and Disadvantages of Putting Life Insurance in Trust

Understanding the role of trusts in life insurance

Rachel Ditchburn
Written by  Rachel Ditchburn
7 min read
Updated: 26 Mar 2024

Discover the benefits and disadvantages of putting your life insurance in trust

Life insurance is more than just a financial product; it's a pledge of protection and a demonstration of love for your family. It's about ensuring that even in your absence, your loved ones are financially secure and can continue to live without the burden of monetary hardships.

However, to truly maximize the value of life insurance and to ensure that your wishes are followed precisely, it's crucial to understand the intricacies of life insurance policies, particularly the concept of writing policies in trust.

While MoneySuperMarket does not offer whole life insurance, it provides deals on term insurance. For those over 50, an over 50s life insurance policy is a viable alternative, offering lifelong coverage without a fixed term. Individuals under 50 can explore deals on level term and decreasing term policies, which may better suit their needs.

Understanding life insurance types

When it comes to life insurance, there are two main types that cater to different needs and serve distinct purposes: term insurance and whole-of-life insurance.

Term insurance: protection for a period

Term insurance is akin to a financial safety net that spans a specific period. This could be the time it takes for your children to become financially independent or the duration of your mortgage payments. If you were to pass away within this term, term insurance provides the necessary financial support to your dependents.

When selecting term insurance, consider the following factors:

  • The length of your mortgage

  • The time until your dependents become financially independent

  • Any significant debts that need to be covered

Whole-of-life insurance: a guaranteed legacy

On the other hand, whole-of-life insurance is the assurance that no matter when you pass away, there will be a payout. This type of insurance is often intertwined with estate planning or considered an investment strategy and may be subject to taxation in certain circumstances.

couple in a car smiling

The importance of trusts

A lesser-known but highly significant aspect of life insurance is the potential to write your policy in trust. This means that upon your death, the policy pays out directly to your beneficiaries, avoiding probate and inheritance taxes, and ensuring that your loved ones receive the benefits without delay or unnecessary deductions.

Tax implications and trusts

Without a trust, the payout from your life insurance could be subject to a hefty 40% inheritance tax if your estate exceeds £325,000. By placing your policy in a trust, you can exclude the payout from your estate's valuation for tax purposes, safeguarding more of your legacy for your beneficiaries.

Setting up a trust

Fortunately, setting up a trust is not a complex process. Insurance companies often provide assistance in establishing a trust alongside the purchase of life insurance. This involves specifying details about the trustees—who will manage the trust—and the beneficiaries—who will receive the payout.

The roles in a trust

In a trust, the settlor is you, the policy owner. The trustees are the individuals you appoint to manage the trust, and they must be chosen with care as they will outlive the settlor and manage the trust according to the trust deed, which is irrevocable. The beneficiaries are those who will receive the payout upon your death.

Types of trusts

Trusts come in various forms, each with its own set of rules and purposes:

  • Discretionary trusts offer flexibility in how benefits are distributed among beneficiaries.

  • Absolute trusts fix the beneficiaries from the outset, with no changes allowed.

  • Split trusts are suitable for policies that cover both life and critical illness, ensuring that benefits are allocated appropriately.

Advantages of trusts

The benefits of writing your life insurance policy in trust are substantial:

  • Avoidance of inheritance tax

  • Quicker distribution of the payout

  • Assurance that the intended recipients receive the money

Disadvantages and considerations

However, there are considerations to keep in mind:

  • Trusts are irrevocable, so be certain of your decisions.

  • Trustees hold significant control over the policy.

  • Trusts can last for up to 125 years, but they typically exist as long as necessary for your personal circumstances.

Cohabiting partners and trusts

For cohabiting partners, trusts are particularly important. They ensure that the surviving partner receives the payout without complications from estate claims, which can be a significant issue for those not married or in a civil partnership.

Finding the Right Life Insurance

Choosing the right life insurance policy is a commitment to your loved ones for their care and well-being. MoneySuperMarket provides a comparison service to help you find life insurance deals that suit your individual needs and estate planning goals. Remember, life insurance is your commitment to your family's future, and writing the policy in trust is a powerful way to fulfil that promise and preserve your legacy.

In the end, life insurance is not just about the financial aspect; it's about peace of mind. It's about knowing that your family will be taken care of and that your final wishes will be respected. It's a final act of love and care that endures beyond your lifetime.

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