Should Your Life Insurance Policy Be Written In Trust
Below is a MRR and PLR article in category Finance -> subcategory Insurance.
Should Your Life Insurance Policy Be Written in Trust?
Overview
According to data from a leading UK life insurance company, only 1% of life insurance policies are written in trust. This is surprisingly low and sheds light on a missed opportunity in financial planning.
Understanding the Concept
When a life insurance policy is written in trust, the insurance company pays the benefits directly to the beneficiaries you have named. This often-overlooked detail can have significant advantages.
Benefits of Writing in Trust
When a policy is written in trust, its proceeds bypass your legal estate, thereby avoiding inheritance tax. To illustrate, consider Mr. A, a widower aiming to equally divide his estate among his two sons. He owns a home valued at £245,000, has a £10,000 mortgage, investments worth £52,000, a car and other items totaling £18,000, and a life insurance policy worth £100,000. Without a trust, the policy forms part of his estate, bringing its value to £400,000. Inheritance tax applies to amounts over £275,000, leaving his estate subject to £50,000 in taxes. His sons would each receive £175,000.
Now, if the life insurance policy is written in trust for his sons, they receive £50,000 each immediately. This reduces Mr. A’s taxable estate to £300,000, resulting in only £10,000 in tax. Each son would get an additional £20,000 tax-free?"simply by signing a few forms.
The Process and Ease
There's no catch. The process is straightforward and typically free, handled by your insurance broker. You only need to provide the beneficiaries' details and sign the necessary forms?"no solicitor required. In the event of a claim, the insurance company directly pays the beneficiaries.
Additional Considerations
Even if your policy is for mortgage repayment, it can be written in trust for a partner. This arrangement ensures that funds go directly to the partner, avoiding legal delays and fees. Whether or not this helps with inheritance tax depends on your estate's value and will structure.
Conclusion
A life insurance policy written in trust offers clear benefits, with no apparent drawbacks. It’s a wise step in securing financial peace of mind. Regardless, always ensure that your will is up to date.
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