Life insurance may not provide the peace of mind to loved ones that you hoped for
January is the most popular time of year for life insurance policies as people get their finances in order during the New Year. The policies are meant to provide peace of mind and support for a person’s loved ones when they die, but not taking one final step after getting the policy could mean their loved ones face a 40 per cent tax charge and months of delays on the payout.
One in five people do not realise that life insurance payouts can be subjected to inheritance tax calculations if it is not written into a trust, according to research by MoneySuperMarket. This tax is currently charged at 40 per cent for estates valued over £325,000.
This could mean your loved ones receive less than you intended due to the tax bill. It could also take a lot longer for the money to reach them if it is subjected to probate too, a process that can take months to complete.
However, placing insurance policies in a trust can avoid both of these issues. Additionally, it only takes one extra form to write these policies into a trust.
Kara Gammell, personal finance and insurance expert at MoneySuperMarket, explained: “With a trust, you get to control what happens to your life insurance. Putting your life insurance policy in trust can make a big difference for your loved ones.
“It means the payout usually bypasses probate, so your family can access the money faster at a time when they may really need it.”
A trust can also allow you to add in extra conditions and criteria around who receives the money and when. For example, if you have young children that can’t manage such a large sum of money and want to keep it aside until they reach a certain age.
Gammell continued: “Setting up a trust is quicker and easier than most people think, and many providers offer this service for free. It’s a simple step that can make a huge difference in protecting your family’s financial future.”
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It starts with asking your insurer for a trust form and then completing this paperwork. As part of the process you’ll need to choose your trustees.
These must be people you believe are responsible enough to manage your assets. However, they don’t necessarily have to be your beneficiaries. Beneficiaries will be the people receiving the assets in the trust, such as children or other loved ones.
Once the form is complete, you’ll need to sign and return it to your insurer. MoneySuperMarket also recommends confirming with your insurer that the trust is in place.
