Life Insurance is a protection policy designed to be there in a time of need. It is not an opportunity to create wealth for future generations, nor is it something to be taken out on the cheap. Proper advice, comprehensive cover and policies in trust give you peace of mind that your family and loved ones are financially protected should the worst happen. Life insurance is often used as an umbrella term for life cover, critical illness cover, income protection and family income benefit. This blog will relate specifically to life cover that is payable on death or diagnosis of a terminal illness.
If someone told you you’d only receive 60% of any claim it could take you up to two years to receive any money, what would you think? Well, this could be the reality if a policy is not placed into a trust.
So what is a trust?
Think of it like this… When you place a policy in trust, a bank account is opened with a zero balance. On death of the person(s) insured, the life insurance pays out straight into the account as soon as the insurance provider verifies a death certificate. The process is that simple and takes a matter of days, no waiting for probate, no inheritance tax, just proper life insurance and proper financial support when it’s needed most.
Of course, there are many different types of trust because things are never that simple… But, what every trust has in common is that they represent a legal arrangement to ensure the proceeds of a policy are used as intended. This could be to clear a mortgage debt or simply to hold the funds in a trustee account until funds can be given to beneficiaries (eg: children). Managing a trust is done by trustees. Owners of the policy can be trustees, but additional trustees are also required in the event of the death of both owners. Trustees should be family, friends or colleagues of a similar age who are financially responsible and trusted by the policy owners.
Without a trust, the proceeds of a life insurance policy are paid into your estate on death. Your estate is simply a sum of everything you own be it property, possessions, savings and investments. Your estate is then subject to inheritance tax at 40% above a specific threshold.
For example, if you have a policy for £300,000 of life insurance cover to protect a mortgage debt of £300,000, losing 40% would mean only receiving a pay out of £180,000 with the remaining £120,000 going to the tax man. For reasons totally avoidable, this still leaves you with a substantial mortgage debt and also means you’ve been paying the monthly premiums for a policy you’re not getting the benefit of – a double whammy of wasted money!
Perhaps more importantly though, if your policy is not in trust, you will have to wait for probate to be granted before accessing any of the funds. Your life insurance is meant to be there in your time of need when it can really make a difference, not a few weeks later, not a few months later and certainly not years later.
If your policies are not currently in trust, this is something we can gladly do for you free of charge. If you’ve any questions regarding trusts, want to review your current life insurance policies or need to take out cover, we’d love the opportunity to work with you and provide peace of mind and proper financial protection for you and your loved ones.