Question : I have recently read that I should ensure all my life assurance policies are written in trust. Is this the case?
Answer: People take out life issurance for a number of reasons. For example, many lenders insist that as part of the terms and conditions of taking out a mortgage, you apply for some life assurance which will ensure any debt is repaid in the event of death.
The main purpose of taking out a life insurance policy however, is to provide the peace of mind that comes with knowing that, as much as possible, life for your dependants will go on without added financial burden.
It is common, over time, for people to build up a collection of policies that are amassed when circumstances throughout life change.
For example with every new home, typically a new mortgage is taken out; with the birth of a child sometimes additional cover is put in place.
However, many people are making the mistake of not writing these life insurance policies in trust.
This means that any life insurance payouts will be added to the inheritance of your family and could take them above the nil rate band for inheritance tax purposes.
Announcements in a previous budget now mean that assets worth £325,000 for an individual and £650,000 for couples are the limit before any tax liabilities.
Any assets over that amount would be subject to inheritance tax at a rate of 40%. So as you can see, it doesn’t take long, by the time you include various life policies, for your dependants to be in a position where tax may be liable.
If a life insurance policy is written in trust this will enable the sum to be excluded from the overall estate of the policy holder, freeing it from inheritance tax liability. It also has the ability to speed up payouts, whether or not it would be liable for the extortionate tax.
Recent figures show that of the life assurance policies that paid out over a 12-month period, over £500bn was subject to inheritance tax, most of this is unnecessary and could easily have been avoided with some simple planning.
It is estimated that only one in 10 people write their life assurance policy in trust, so not only is there the likelihood of unnecessary tax to pay, but the added complication of delays and stress at a time when your dependants don’t need that added pressure.
Will reading and distribution of assets can be a notoriously lengthy procedure. This can put a huge financial strain on the family.
Life insurance policies that are written in trust would be paid out immediately, making things a whole lot easier.
Whether you affect your life insurance over the internet, over the phone or through an adviser they should all offer the opportunity of placing the policy in trust, and if they fail to do so, then they are not doing the job correctly.
Life insurance comparison websites are a popular route to setting up life assurance but there is a concern that individuals will just take out the cheapest cover rather than the one which is most suitable to their circumstances.
By placing a policy in trust you are simply ensuring that the right money ends up in the right hands at the right time.
It is not a complicated exercise and ideally should be put in place when the policy is being set up, but if necessary can be put in place afterwards, even years after the policy has started.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or (028) 9022 1010