One of the largest life insurance companies in the UK says that only 1% of life insurance policies are written in trust. That is disgusting and makes the financial industry look bad.
Let's explain.
If your life insurance policy is "Written in Trust," then if you make a claim, the insurance company will send the money directly to the people you named as beneficiaries on the policy. It's easy to miss how important this is.
It means that if the policy is "Written in Trust," the money from it never becomes part of your legal estate and isn't taxed. The following numbers show just how important this is:
Take Mr A. He is a widower who wants to give his two sons an equal share of everything. He owns his home, which is worth £245,000. He still owes a mortgage of £10,000. His investments are worth 52,000 GBP, and his car and other belongings are worth 18,000 GBP. He also has a GBP100,000 policy on his life that is not written in trust. We figure that it will cost GBP5,000 to take care of his estate and get probate.
If Mr. A died right now, the value of his estate would be GBP400,000 less Inheritance Tax. At the moment, 40% of the value of his estate over GBP275,000 is taxed as inheritance tax. This means that the tax man will get GBP50,000 and each of his sons will get GBP175,000.
Now, let's use the same numbers, but this time let's say that Mr. A's life insurance policy is "Written in Trust" and that both of his sons are the equal beneficiaries. Because the insurance company pays out directly to his sons, they each get GBP50,000 right away. This money is not part of Mr. A's estate because it goes directly to his sons. This means that his estate is now worth GBP300,000, but the tax man can only take GBP10,000. Each of his sons gets an extra GBP20,000 that is not taxed.
So Mr. A saves GBP40,000 just by signing a few forms.
What's the catch? No, all of the paperwork is standard and is given to you by the life insurance company for free. If you buy the policy through a broker, that person should also fill out the paperwork for you for free. Just tell the broker about the people who will get the money and sign the form. There is no need for lawyers. When a claim is made, the life insurance company has to pay the beneficiaries directly. Job done! Poor Mr Taxman!
Even if your policy is meant to pay off a mortgage, it should be "Written in Trust" for your partner. Then, instead of the money going to your estate and being used to pay off the mortgage, it can be sent directly to your partner. This avoids legal delays, fees for lawyers and probate, and a lot of trouble. The money can then be used by your partner to pay off the mortgage. Whether this also saves you money on inheritance tax depends on how much your estate is worth and how your Will is set up.
So we think that a "Written I Trust" life insurance policy is a win-win situation. And there aren't that many of them around anymore! We can't think of any problems.
By the way, no matter what you choose to do, you should always make sure your Will is up to date.
