According to one of the largest UK life insurance companies,
just 1% of life policies are written in trust. That is
disgraceful and reflects poorly on the financial industry.
Let's explain.
If your life insurance policy is "Written in Trust" then, in the
event of a claim, the insurance company pays out directly to the
beneficiaries you name on the policy. The significance of this
is easily missed.
It means that if the policy is "Written in Trust", the proceeds
from the policy never form part of your legal estate and are not
subject to Inheritance Tax. The importance of this is
illustrated by the following figures:
Take Mr A. He's a widower and wants to leave everything equally
to his two sons. He owns his home which is currently worth
£245,000 with a £10,000 outstanding mortgage. His investments
are valued at £52,000 and his car and other chattels are worth
£18,000. He also owns a life insurance policy for £100,000 which
is not written in trust. We assume that the costs of
administering his estate and obtaining probate would be £5,000.
If Mr A were to die now, his estate would be worth £400,000 less
Inheritance Tax. Inheritance Tax is currently levied at 40% on
the value of his estate over and above £275,000 - that means
that the taxman will walk off with £50,000 and his sons would
each receive £175,000.
Now lets assume exactly the same figures except that in this
case the life insurance policy is "Written in Trust" with Mr A's
sons as equal beneficiaries. Because the life insurance company
pays out directly to his sons, they each receive £50,000
straight away and non of the money is included in Mr A's estate.
This means that his estate is now worth £300,000 and the taxman
can only walk away with £10,000. Each of his sons receives
£20,000 more and tax-free!
So simply by signing a few forms, Mr A saves £40,000 tax!
Is there a catch? No - all the documentation is standard and is
provided totally free of charge by the life insurance company.
Your broker through whom you buy the policy, should complete the
documentation for you, again free of charge. All you have to do
is give the details of the beneficiaries to the broker and sign
the form. Solicitors are not required. In the event of a claim,
the life insurance company then has to pay out directly to the
beneficiaries. Job done! Poor Mr Taxman!
Even if your policy is designed to repay a mortgage, it should
be "Written in Trust" for your partner. Then, rather than your
estate receiving the money and using it pay off the mortgage,
the money can be paid directly to your partner. This saves legal
delays, solicitor's and probate fees and loads of hassle. Your
partner can then use the money to personally pay off the
mortgage. Whether this also saves you Inheritance tax will
depend on the value of your estate and how you have structured
your Will.
So we believe that a life insurance policy "Written I Trust" is
a win win situation. And there aren't many of those around these
days! We can't see any drawbacks.
Bye the way, no matter what you decide to do, always ensure that
you have an up-to-date Will.
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