Many of us take out life insurance to provide financial protection for our loved ones when we pass away. But without the proper administration in place, a certain percentage of your life insurance could be taken directly by the Government. Your life insurance automatically forms part of your estate, meaning it’s value is added to any other assets you own (including your property and all other assets).
Where does your money really go?
40% of anything over the value of £325,000 is paid directly to the Government in the form of inheritance tax (IHT).
A basic IHT example
If your property was worth £300,000 and your life insurance £200,000 your loved ones would pay 40% of £175,000, (£500,000 minus £325,000). That’s £70,000 you would be paying to the Government in inheritance tax. But rest assured, there is something you can do to avoid (or at least reduce) the overall amount of inheritance tax you have to pay.
By writing your life insurance in trust you legally detach the sum of your life insurance from your estate. This means that the sum of your life insurance will no longer be eligible for inheritance tax. This will subsequently reduce the value of your overall estate, again reducing the overall amount of inheritance tax paid and increasing the amount received by your loved ones.
Alongside the avoidance of inheritance tax, writing your life insurance policy in trust also offers two other key benefits.
- Skip the lengthy probate period, (usually lasting 6 to 9 months)
- Gain greater control on how your payout is distributed
Unfortunately, when you die it can take a while for your loved ones to gain access to your estate. This is due to a process called probate. This may cause your family financial shortcomings with regards to legal fees and rising funeral costs.
Due to the detachment from your estate, your loved ones do not have to go through the lengthy probate process before they can gain access to your life insurance.
Writing your life insurance in trust also allows you to specify who you would like the payout sum to be distributed among. This is carried out by a trustee whom you specify. Whilst your wishes are carried out at the discretion of the trustee, it does mean you can avoid your policy being used to fund outstanding debts or other required costs, ensuring your loved ones benefit as much as possible. If you have young children you may also specify that you want the payout to be paid to them equally, however not until they reach adulthood.
Writing your life insurance in trust – The process
Now that we have established what needs to be done to ensure your loved ones benefit as much from your life insurance as possible – Let’s take a look at the actual process. Writing your life insurance in trust is a free service you can do yourself. Within your policy documents tends to be a form (although these are also available on the individual insurer websites) which you fill out specifying exactly who you wish your life insurance to go to. You then specify trustees to carry out this distribution on your behalf (similar to an executor of a will).
It is crucial when declaring your trustees that you choose someone your trust. You are handing over your life insurance policy to them and carrying out your wishes with regards to payment distribution is done at their discretion.
Only 6% of life insurance policies are written in trust!
Despite being extremely beneficial for your loved ones, only 6% of policyholders (source: Aegon) go through the process of writing their life insurance policies in trust, but why?
Ultimately it tends to be one of three explanations;
- They are unaware the option exists
- They do not fully understand the benefits
- They are intimidated by the process
Whilst it can be easy to avoid writing your policy in trust because the task seems daunting, the benefits of doing so can be huge. Most insurers will provide you with the help and guidance needed to work through this process so it is important to get in touch if writing your policy in trust is of importance to you.
- Detaches your life insurance from your estate
- Avoids/reduces the amount of inheritance tax your loved ones will pay
- Allows your loved ones instant access without having to go through probate
- Provides you more control over how your payout is distributed
- It is completely free to write your life insurance in trust
Whilst the process can be daunting, most insurers will provide guidance.
Featured image New Africa/Shutterstock
*This is a collaborative post*