|
Should Your Life Insurance Policy Be Written In Trust?
By: Michael Challiner
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.
About the Author:
Express Life Insurance specialise in life insurance quotes uk but also offer both critical illness cover and life assurance policies.
|
