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Life insurance and trusts: why they go hand-in-hand

Category: IFAs

Life insurance is a well-known protection measure and many people take out a policy to ensure that, if the worse happens and they die, their loved ones are looked after.

The assumption by many is that the policy will instantly pay a lump sum to their family, easing the financial burden during a very difficult time.

Unfortunately, all too often this is exactly what fails to happen. There is a hold-up in payment, or the payment may not even go to the correct beneficiary.

Why does this happen? The answer is, the policy hasn’t been put into a trust.

Trusts are a simple and effective way of ensuring that the right people, receive the right amount of money, right when it’s needed most.

In essence, there are three main benefits to putting life insurance in a trust:

Inheritance tax planning and life insurance

If a policy is put into a trust, then it is left outside the estate for inheritance tax purposes. In other words, no IHT is liable on the payment. With the value of property rising, more and more homeowners are being caught in the inheritance tax net, so placing a policy in trust and thus avoiding IHT will benefit many.

Waiting for probate

Payment from a life insurance policy in trust can be made before probate is granted. This could be within a matter of days, once a death certificate has been presented.

However, without a trust, payment has to wait until after probate is granted, and in some cases this can take months or even years. Research has shown that of those still waiting for a life insurance pay-out 100 days after their loved one has died, 40 per cent of the delays are due to waiting for probate.

Benefiting the right people

There are still very many people – some two thirds of the population – who do not make a will, and so die intestate. And not having a will leaves problems when it comes to paying out a life insurance policy which isn’t in trust.

Dying intestate causes delays in the probate process and, as we’ve already said, payments are made only after probate has been granted.

But not having the policy in trust may also mean the payments do not go to those people you want to benefit. For example, if you are unmarried or not in a civil partnership the payment from a policy may go to your parents, even if you would have preferred the money to go to your partner. Putting the policy into a trust sets in stone your beneficiaries, whether that be a spouse, partner, your children, friends, charities or even your goldfish!

If you already have life insurance, and aren’t 100 per cent certain whether or not it is in trust, we can look into this for you. If it turns out not to be in trust, don’t worry – we will help you take the necessary steps to make a change. If you are thinking of life insurance for the first time, again we can look at the best policy for you and ensure it is put in trust.

Setting up a trust need not be a complex process and is one that surely can’t be discounted when taking out life insurance.

How Can Hartsfield Help?

For more information about life insurance policies, trusts and inheritance tax planning, please get in touch with the team at Hartsfield.

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