Placing a life insurance policy in trust means that someone else – the trustee(s) – is looking after it.
It is quite a simple arrangement. And it means that your family will not have to pay inheritance tax on any sum paid out by your life insurance.
How does a trust work?
There are three types of people involved in a trust. First, there is the ‘settlor’. That’s the person who is placing their policy into the trust. They still pay the premiums as normal.
There are then the ‘trustees’. This person (or people) looks after the policy and will make a claim in the event of the settlor’s death. They become the legal owners of the policy, but must act in the best interests of the beneficiaries.
The ‘beneficiaries’ are the third type of person involved. They are the person or people who will receive the money from the trust fund. The ‘trust fund’ will be the money paid out from the insurance policy.
What is the point?
There are two main advantages to placing a policy in trust.
A policy in trust does not count as part of your estate upon death. This means that inheritance tax will not take away a chunk of the sum paid out.
The beneficiaries will also receive the money much faster. With a normal policy, it may take a long time for your representatives (for example a solicitor) to get a ‘grant of probate’. This is the legal permission they need to be able to manage the funds.
This rule does not apply to a policy held in trust. So the money paid out by the insurance company will reach your beneficiaries faster.
Does it cost anything extra?
Placing a policy in trust in most cases will not incur any extra costs.
Check with your chosen insurer to establish if this is the case.
Can all types of policy be put into trust?
Most types of life insurance can be placed in trust. Level term, decreasing term, and whole of life cover may all be put into trust.
If you’d like to put a policy into trust but you aren’t sure if you’re allowed, ask your provider. They will be able to tell you if it is possible.