“Insurance companies don’t pay out”.
That’s a common perception of protection providers who do not have the trust from a lot of UK consumers.
A discussion of this view is for another time and another blog, but while it is true to say that historically some policy holders have been refused a pay out on their cover for various reasons, what could be in fact be more common and potentially worse is when a policy DOES pay out, but the people it is intended to benefit (often vulnerable people such as bereaved partners and children) DON’T receive 100% of the money they were supposed to.
Imagine paying for cover where 40% of it goes to the tax man!
According to the Association of British Insurers, in 2017, the UK insurance industry paid out a record £5 billion in protection claims. Yes, £5 billion. That’s a lot of money intended to do a lot of good.
While not all of this was in life insurance, over 50% of it was. That’s over £2.5 billion which spouses, partners and parents intended to go to their loved ones. While we do not have figures to evidence how much did or did not go to the people it was intended for, it is unlikely that all of this went to the family member it was intended to help. Why? Because the money may have been legitimately taken away due to Inheritance Tax.
But fear not, because like a financial planning superhero
a trust could be a SIMPLE, EASY and FREE way to ensure that those you wish to benefit truly do so.
How a little TRUST can go a long way
So, what is a Trust and how can it help ensure that the people you want to benefit from the insurance you are paying for actually do benefit?
A trust is essentially a legal entity, set up to take ownership of an asset where you appoint a trustee or trustees to administer the trust. These could be family, friends or a professional such as a solicitor or accountant. When a policy pays out to a trust it avoids going in to your estate on death. This means that the money avoids Inheritance Tax therefore the placing of a policy in ‘trust’ can assist your loved-ones avoid a large tax bill on the amount they receive, while also assisting them obtain the proceeds faster and easier through avoiding the process of probate. This is itself an additional, and if anything even more important benefit of having a trust in place for a life cover policy. The people you want to benefit from the proceeds do so faster and without going through a potentially complex legal process to do so. This can be vital after someone dies where a jointly held mortgage, reliant on two incomes to afford the payments, suddenly only has one income to service it. Avoiding a long delay due to probate, which could last for six months or more, could affect your ability to afford the monthly payments and could in the worst of cases lead to loss of the home.
Too good to be true?
This all sounds a little too good to be true doesn’t it? Surely such an arrangement must be complex to put in place and costly if it does so much? Not necessarily, the process of placing a policy in trust is relatively simple with many insurers offering this option free of charge. A good protection advisor should be able to discuss your trust options with you and not charge you anything additional for advising on and assisting with the set-up of this potentially vital piece of financial planning. Often, even existing policies can be placed in to a new trust, without cost and relatively easily. And thats how a little trust can go a long way.
However, before you rush to stick everything into a trust, first a note of caution. It’s vital to think carefully in what you want your life insurance to do for you and your family now and in the future and as a result we would always advise a policy holder, or someone looking to take out a policy, to seek advice from a financial advisor or protection specialist to ensure they understand what they are doing and use the right trust arrangements for their circumstances and intentions. This is because once it has been written in trust, it no longer belongs to you but has been handed over to the trustees.
Remember, if you want to trust that your policy will do what you intended it to, then take advice on placing your new or existing cover into a trust.
The Financial Conduct Authority does not regulate Inheritance Tax and Trust Advice. Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.