Ultimate Guide to Life Insurance Trusts
One of the less common facts about life insurance is that you ‘should’ be putting your policy in Trust. This is rule set out by the Financial Conduct Authority (FCA), that all life insurance brokers should follow to safe-guard your family in the event of a claim.
Another fact is that placing your life insurance policy in Trust is free and can usually be completed online. The key benefits of a life insurance Trust is that it is a legal document that ensures your wishes are followed for your life insurance pay out if you die (similar to a Will but without the cost) and that it is tax-efficient (Inheritance Tax Liability).
A life insurance Trust is a way for you to have more control of over how your life insurance policy pays out. You can specify exactly who the money from your life insurance policy will go to in the event of your death. Trusts even include some great extra benefits like avoiding probate and reduced inheritance tax, so your loved ones get a bigger pay out overall.
A recent survey by insurer Swiss Re discovered that almost 80% of new life insurance policies are not written into Trust. We were shocked to read so many people are missing out on the benefits that Trusts have to offer, but we do understand that not everyone will be aware of what a Trust is or how it works.
Our aim is to bring you the ultimate guide to life insurance Trusts! We’re going to cover everything you could possibly want or need to know about Trusts, so they don’t feel as complicated or confusing. And if you need any more information, our friendly life insurance experts are here to help.
60-Second Summary – Ultimate guide to life insurance Trusts
Most UK life insurance providers will be able to write your life insurance policy into Trust, to give you more control over the pay out from your policy.
- What is a Trust? – A Trust is a legal document that specifies who receives the benefit from your life insurance policy (and you can even specify how the money is used if you wish to)
- Where can I get a Trust from? – All major UK life insurance companies will give you the option of having a Trust. You can have a life insurance Trust with insurers like Aviva, Legal & General, Vitality, Scottish Widows and many more…
- When should I put life insurance in Trust? – It can be simplest to put your life insurance in Trust as soon you buy it, but you can also get in touch with your insurer at a later point to set this up.
- Why have a Trust? – A Trust is a great way to have more control over who receives the pay out from your life insurance policy and can help your loved ones avoid factors like inheritance tax and probate.
- How do I get a Trust? – You can ask your life insurance provider when you apply, contact your current insurance provider or speak to a life insurance expert for help and advice.
What is a Trust?
Almost all life insurance policies will pay out a cash lump sum in the event of your death. The exception to this would be a family income benefit policy which would instead pay out regular payments (an ‘income’), rather than one lump sum.
A life insurance Trust is a legal document which specifies who receives the pay out from your life insurance policy. Many people use Trusts as a free alternative to a Will (though Trusts will only control the life insurance payout, not your whole estate).
A Trust can be a great way to make sure the pay out from your life insurance policy goes to exactly where you wish. This could be a loved one such as family members (e.g. a spouse or child), a business partner, a friend or a charity. You can even state in your Trust what you wish the funds to be used for if you have something specific in mind (e.g. paying off your remaining mortgage balance).
There are 3 people to consider when putting a Trust in place:
- The settlor: this would be the person who has the life insurance policy
- The trustee(s): the person or people who manage the Trust
- The beneficiary: the recipient(s) of the Trust money from the policy claim
Life insurance is the #1 way to protect your loved ones from financial difficulty if you were to pass away. A Trust allows you to go a step further by ensuring your specified beneficiaries will receive the pay out far quicker due to skipping typical legal steps such as probate.
Who can be a beneficiary of a life insurance Trust?
You can choose anyone that you would like to be a beneficiary for your life insurance Trust – there’s no set rules about this. Popular choices include:
- A partner or spouse
- Your child(ren)
- Your grandchild(ren)
- Close friends
- Business partners
How does a Trust work?
With a Trust, your life insurance policy will be managed by trustees rather than you as the policy owner. They are responsible for the Trust deed and legally own the policy, but you are still responsible for paying for the policy every month.
In the case of a discretionary Trust, the policy owner can also be a trustee and keep some control of the policy. This can be very helpful for you if the policy needs adjusting at any point.
In the event of your death, the trustee or trustees will put in a claim to the insurance provider. After this point they will then ensure the pay out goes to your specified beneficiaries (the person or people you have specified to receive the money).
FCA rules on life insurance trusts
The Financial Conduct Authority (FCA), which regulates the financial services industry in the United Kingdom, has strongly backed the need for life insurance (non-investment insurance) to be written in to Trust.
The responsibility for this is placed firmly at the door of life insurance brokers who ‘should’ be placing policies sold in to Trust. If your life insurance broker is not recommending that your policy be placed in to Trust then you should contact them to ask about it.
Are there different types of Trusts for life insurance?
YES – One good thing about Trusts is there are usually a few options to choose from, so you can pick the one that best suits your own situation.
There are many available types of Trust when it comes to life insurance which are:
With a Discretionary Trust, the trustee(s) can have more control over the trust. This means the person or people you have decided to manage your policy pay out can make decisions such as how much money each person named is entitled to.
They will also be able to make changes like adding or removing beneficiaries where needed e.g. after a marriage or divorce. Though the trustee does have a high level of control, they should take your wishes into account and it’s important to choose someone you trust.
With a Flexible Trust, there will be more than one type of beneficiary e.g. a default beneficiary and a discretionary beneficiary.
Put simply, you can specify who you want to receive the pay out from your policy and they will be the default beneficiary/beneficiaries. The second type of beneficiaries are ones who are added later by the trustees and if no additional beneficiaries are added all the money will go to the default beneficiaries.
This is the least flexible type of Trust, so you need to think carefully if this is right for you. With an Absolute Trust, the beneficiaries cannot be changed after the policy has been put in place.
The pay outs are often quicker though and it works for people who are certain they will not want to change their beneficiaries further down the line. Be aware though that this means you wouldn’t be able to add future children or grandchildren for example or remove a beneficiary if you wanted to.
Survivor’s Discretionary Trust
This type of Trust is commonly used for joint life insurance policies. You can set beneficiaries together e.g. your child(ren), but in the event of one policy holder’s death the Trust will pay out to the surviving policy owner before the beneficiaries.
The main exception to this is if both policy holders pass away within 30 days of each other, in which case the money goes straight to the beneficiaries.
With a Bare Trust, the money in the Trust is for someone under the age of 18.
The trustee will hold onto the assets in the Trust and transfer them to the beneficiary once this age is reached.
A Split Trust is a specific type of Discretionary Trust. It can be useful for policies where you have combined two types of cover e.g. life and critical illness cover.
You would be able to have the life insurance element of your policy be held in the Trust and either place the critical illness cover in Trust or receive the pay out from this yourself (if you are eligible to claim).
Which type of Trust is right for me?
The type of Trust that is right for you and your life insurance policy will depend on the type of life insurance you have and how flexible you want your Trust to be.
Discretionary Trusts are a popular option, as they allow you to keep some level of control over your policy. They are the most flexible type of Trust because you can still make changes even years after the policy is written into Trust.
Other types of Trusts will work better for different situations and some are designed for specific types of life insurance policy. Legal & General for example, have two Trusts which have been developed to use for business life insurance policies only.
Which life insurance providers offer trusts?
Trusts are widely available in the UK and most life insurance providers will be able to write your policy into Trust. Here’s all the main UK life insurance providers and which types of Trusts they offer to make things a bit clearer and simpler for you.
What Trusts are available with Aviva life insurance?
Aviva offers several types of Trust for their life insurance customers:
- Aviva Discretionary Gift Trust: These Trusts can be used for single or joint life policies. A Discretionary Trust is flexible, so it allows you to make changes over time e.g. removing beneficiaries or adding new ones.
- Aviva Survivor Trust: You can use this type of Trust for joint life policies (except critical illness insurance). This Trust specifies the surviving partner receives the pay out from a life insurance policy and not the beneficiaries (unless both partners die within 30 days of each other).
- Aviva Relevant Life Insurance Discretionary Trust: This is a type of Discretionary Trust that has been designed to be used for business life insurance policies (relevant life insurance).
What trusts are available with AIG life insurance?
There are two types of AIG life insurance Trusts available:
- AIG Discretionary Trust: the most flexible type of Trust deed that allows you to change your beneficiaries and what they are entitled to at any time.
- AIG Bare Trust: A simple (but less flexible) Trust deed that allows you to decide who will benefit from your life insurance policy (cannot be changed).
Note: AIG Life was bought out by Aviva in 2022, with customers transferring to Aviva in 2023. This shouldn’t affect any existing Trusts, but AIG are no longer taking new life insurance applications.
What Trusts are available with Legal & General life insurance?
Legal & General offer four types of Trust to their life insurance customers:
- Legal and General Discretionary Trust: The most flexible Trust available which lets you change who benefits and what they are entitled to receive at any point.
- Legal and General Absolute Trust: This Trust has set beneficiaries which can’t be changed later (even if you remarry for example or have more children).
- Legal and General Relevant Life Trust: These are specifically for business life insurance (relevant life insurance policies)
- Legal and General Master Trust: These are specifically for business life insurance (group life insurance policies).
What Trusts are available with LV life insurance?
LV have 3 options for Trusts for their life insurance customers which are:
- LV Fixed Trust: This Trust is usuallyused for life insurance and investment bonds, and you can’t change any beneficiaries after the Trust is in place.
- LV Flexible Trust: This trust is also used for life insurance and investment bonds but the Trust allows the Trustees to change who benefits from the policy in the future.
- LV Split Trust: This type of Trust can be helpful for splitting up the benefits in a life and critical illness cover policy (e.g. keeping the life insurance element in trust but allowing you access to any pay outs from the critical illness cover) – can also be used to separate your terminal illness benefit.
Note: All LV Trust forms can be viewed on downloaded here from the LV website.
What Trusts are available with HSBC life insurance?
The main option for Trusts with HSBC policies is a HSBC Life Flexible Trust. Their Flexible Trust allows you to make changes to your Trust at any point so you can add or remove beneficiaries as and when you need to.
What Trusts are available with Royal London life insurance?
Royal London life insurance customers have the choice of 4 types of Trust:
- Royal London Split Trust: This is used for policies where you have life and critical illness cover for example. You can split the benefit of your policy so the life element is in Trust but you still have access to the critical illness benefit if you need to claim.
- Royal London Gift Trust: This a popular Trust option that is mostly used for protecting your family or estate planning to avoid inheritance taxes and probate
- Royal London Relevant Life Trust: These are specifically for business life insurance (relevant life insurance policies)
- Royal London Business Trust: These are specifically for business life insurance as a business protection plan for your partners, members or shareholders.
What Trusts are available with Scottish Widows life insurance?
There are 5 main types of Trusts available for Scottish Widows life insurance policies:
- Scottish Widows Flexible Split Trust: A flexible Trust which lets you adjust who benefits at a later point. It is usually used for combined life and critical illness policies as it allows you to put your life insurance in Trust but keep hold of access to your critical illness cover.
- Scottish Widows Flexible Gift Trust (Discretionary Trust): A type of discretionary Trust which is also known as a ‘Family Protection Trust’. The beneficiaries are ‘gifted’ all benefits from your policy.
- Scottish Widows Absolute Split Trust: This works the same as the Flexible Split Trust but doesn’t allow you to make changes to your Trust (e.g. change the beneficiaries) at a later point.
- Scottish Widows Absolute Gift Trust: This works the same as the Flexible Gift Trust but doesn’t allow you to make changes to your Trust (e.g. change the beneficiaries) at a later point.
- Scottish Widows Business Trusts: You can have a Business Trust or Relevant Life trust depending on the type of business life insurance policy you have.
What Trusts are available with The Exeter life insurance?
Unlike other providers in this list, The Exeter only has one type of Trust available which is their ‘The Exeter Life Cover Trusts’. These are a type of Flexible (Discretionary) Trust which lets you change who benefits at a later point if you need to.
What Trusts are available with Vitality life insurance?
Vitality offer 2 types of Trust to their life insurance customers:
- Vitality Life Discretionary Trust: This is a flexible type of Trust which allows you to make changes at a later point (e.g. adding new children or grandchildren)
- Vitality Life Absolute Trust: These Trusts are useful if you are certain you won’t want to change who benefits in the future, but are much less flexible.
Should I put life insurance in Trust?
A Trust can be a great idea if you want to ensure your life insurance pay out goes to a specific person or people. It means that you can make sure your loved ones are protected after you are gone, and they should receive your policy pay out far more quickly via a Trust.
This is because a Trust allows the pay out from your claim to skip probate and you could even avoid some taxes – meaning your beneficiaries would stand to receive more money. This money can then be used for expenses like funeral bills or to fund things such as holidays for your loved ones to enjoy.
What are the advantages and disadvantages of putting life insurance in Trust?
Here are the main life insurance in Trust pros and cons to help you decide if placing life insurance in Trust is right for you.
|Your loved ones will receive the pay out from your life insurance policy much faster as they can skip probate||All trustees need to sign off on any changes to the Trust (less control over your policy)|
|You can specific exactly who receives the benefit from your life insurance policy and even what the money is used for||Once a policy is in Trust it cannot be taken out of Trust|
|The money won’t be part of your estate and can’t be automatically claimed to pay off a mortgage or other outstanding debts||If you have an Absolute Trust, you can’t add or remove beneficiaries at a later date|
|You may be able to avoid certain taxes being applied to your estate (e.g. inheritance tax) as a Trusts will keep your life insurance pay out separate*||Taxes like inheritance tax (IHT) might still need to be paid under certain circumstances. It’s best to speak to a financial advisor to clarify when this would apply.|
Myth busting: What is really true about life insurance Trusts?
Here’s some of the most common thoughts and myths about life insurance Trusts (and whether they are true or false).
It costs more to have a Trust for your life insurance
FALSE – Most insurers will let you write your life insurance into Trust with no extra charges.
Trusts are often considered to be cost effective alternatives to a Will, though they do only handle your life insurance and not other financial assets you might have.
You have to put every life insurance policy in Trust
FALSE – You don’t have to have a trust for your life insurance policy, but it is recommended.
A Trust can make it much simpler to receive the money from your life insurance policy and it lets you specify exactly who receives so you know your wishes will be followed.
You can’t be a trustee for your own policy
FALSE – Certain Trusts (usually Discretionary Trusts) will allow you to be a trustee on for the Trust for your own life insurance policy.
This can be helpful if you want the security that a Trust offers, while still holding onto some control over your policy.
Trusts help you to avoid inheritance tax
TRUE – Inheritance can take as much as 40% of your estate after you die, and a Trust can help your loved ones avoid this happening. This is because inheritance tax will only apply over certain thresholds (normally if your estate is worth more than £325,000 overall).
A Trust keeps the benefit from your life insurance separate to your estate, so this doesn’t count towards the inheritance tax threshold.
There may still be certain situations where inheritance tax will apply though, so it’s worth speaking to your accountant or a financial advisor if you have further questions.
I don’t need a life insurance Trust if I have a Will
TRUE – You don’t need to have a Trust, but there are some benefits to having a Trust as well as a Will.
A Will covers your entire estate and what each person gets after you die. A Trust keeps the life insurance element of this separate, so it doesn’t form part of your estate – which can lower or help completely avoid inheritance tax charges.
There is also no need for probate with a Trust which can often be a lengthy process. Skipping this means that your loved ones will receive the money from your policy much faster than if you leave it to them in your Will.
How to complain about a Trust or insurance provider
If you aren’t happy with your life insurance provider and feel that your Trust has been mishandled or badly explained, you can submit a complaint.
You should contact your provider first, to see if they can resolve your issue (usually providers will do what they can to make things right). If you still are unhappy or immediately want to take things further, you can contact the Financial Ombudsman Service (FOS) for help and advice.
Making a complaint to the Financial Ombudsman Service
The Financial Ombudsman Service (FOS) is an impartial and free service for financial services customers in the UK. This service can be used to settle any disputes between life insurance companies and their customers in the United Kingdom. If they feel that you have suffered any financial loss as a result of your life insurance policy, then they may rule for compensation to be awarded.
Telephone – 0800 023 4567 (or 0300 123 9123)
Telephone (outside the UK) – 0207 964 0500
Frequently asked questions about Trusts
Why put life insurance in Trust?
Some of the main reasons people choose to write their life insurance into Trust are:
- To skip probate (a lengthy legal process which can delay the pay out from a life insurance policy)
- To reduce the amount of inheritance tax paid when you die (a Trust keeps your life insurance policy separate to your estate)
- Having greater control over how your life insurance policy pays out
Can you write joint life insurance in Trust?
YES – You can write a joint life insurance policy into Trust. There are specific Trusts known as Survivors Discretionary Trusts which are designed for exactly this purpose.
With this type of Trust, if one partner dies the benefit from the life insurance policy will be paid to the surviving partner (if they live for 30 days or more after the first partner’s death). You will also have named beneficiaries who would receive the benefit if both partners died within 30 days.
Do we need to be married to write joint life insurance in Trust?
NO – There is no rule that people who apply for joint life insurance need to be married, so there shouldn’t be issues with writing these policies into Trust either.
The process will be the same whether you are married or not. You apply for a joint policy and then fill in a life insurance Trust form. You can also write a joint life insurance policy into Trust months or years later, by contacting your provider or talking to a life insurance expert.
Cohabiting couples (those who live together) but aren’t married won’t automatically have legal rights to claim on a life insurance policy for each other in the way a married couple would. A Trust is a way to specify your wishes and have them stated in a legal document.
How long does a Trust last for?
Money can be in a Trust for anywhere up to 125 years. It’s unlikely that you would want your money in Trust that long though and you can specify the length of time yourself.
Some people choose for their life insurance to only be in Trust up until their mortgage is paid off for example.
Do you need to pay extra to have a Trust for life insurance?
NO – Usually Trusts will be free and your insurance provider will normally have simple forms that you can fill in to set up your Trust.
It can be helpful to have the guidance of a life insurance expert when setting up a Trust, as they can advise you of all the details you need and which type of Trust will work best for you.
How long does it take to receive a pay out from a life insurance policy in Trust?
This can vary depending on the life insurance provider as it depends on how long it takes them to process the claim and their usual timeframe for paying out.
It will usually be quicker than if you do not have a Trust though, as otherwise the pay out would have to go through lengthy legal proceedings like probate. You can skip probate with a life insurance Trust as the money is kept separate and there is already a legal document stating your wishes for who will receive it.
What does a life insurance Trust do?
A life insurance Trust allows you to have more control over how your life insurance policy pays out. A Trust is a legal document which will specify who receives the benefit from your life insurance policy (beneficiaries) and who is in charge of making sure this happens (trustees).
Your Trust essentially transfers the legal ownership of your life insurance policy to your trustees, but you will still be responsible for paying for your policy unless there is another arrangement in place (e.g. your employer pays for policy).
Is it worth putting life insurance in a Trust?
Whether Trusts are ‘worth it’ will be down to personal opinion, but there are some great benefits of having a life insurance Trust. A Trust:
- Lets you decide (and legally specify) who receives the pay out from your life insurance policy
- Reduces the amount of Inheritance Tax (IHT) your loved ones will need to pay – or even avoids it completely
- Your life insurance pay out can skip legal processes like probate, so your insurer can pay out quicker
Can you take money out of a life insurance Trust?
NO – Once your policy is in Trust, you won’t be able to remove money from the Trust. This is fair as generally you won’t be able to access the money from your life insurance policy before your death anyway. The exception to this is if you need to claim on terminal illness benefit or you are claiming for critical illness on a life and critical illness cover policy.
There are specific Trusts (Spilt Trusts) which are designed for this situation. A Split Trust will let you place the life insurance aspect of your policy in Trust and keep access to the critical illness cover element if you need to claim.
What is a Trust form for life insurance?
A Trust form is the document you will need to fill in when setting up your life insurance Trust. The insurance provider will have specific forms for each type of Trust that they offer and will send you the relevant one for the Trust you need.
The form will ask for information about yourself and your chosen trustees and beneficiaries and you and your trustees will need to sign this form before your Trust can be set up.
What are the disadvantages of writing life insurance in Trust UK?
There are a few life insurance Trust disadvantages that it are important to be aware of before you make any decisions:
- You will need all your trustees to sign off on any changes you want to make to your life insurance policy
- Once a policy is in Trust, this is permanent and the policy can’t be taken out of Trust
- There are types of Trust (Absolute Trusts) which won’t let you make changes to who benefits from your policy, even if your circumstances change (e.g. you have a new baby or remarry)
- The tax advantages can be a main selling point but you may still need to pay Inheritance Tax in certain situations (you should speak to a financial advisor for more information about this)
Generally, the pros do outweigh the cons with Trusts and they are a useful way to manage your life insurance and how it pays out.
What are the benefits of a Trust in Aviva?
Aviva is a popular choice for life insurance in the UK and they offer several types of trust for their policies. Advantages of Aviva life insurance trusts include:
- Several types of Trust to choose from, so you can pick the one that works best for your policy and situation
- A Trust gives you more control over your Aviva life insurance policy, how it pays out and who it pays out to
- You can specify a % share of your policy benefit per beneficiary within the form
- You can separate benefits such as terminal illness benefit and total permanent disability from your main trust so you still have access to these funds if needed
Do you pay Inheritance Tax (IHT) on life insurance UK?
YES – In most cases you will need to pay Inheritance Tax on a life insurance pay out, if the overall estate of the policy holder is more than £325,000. Inheritance Tax charges can be as high as 40% of the overall value of the estate.
Your ‘estate’ refers to anything you own including property, money and any other assets (e.g. stocks or investments). A Trust is a useful way to keep your life insurance separate to this, which can reduce (or help completely avoid) large Inheritance Tax bills.
Are Trusts exempt from Inheritance Tax (IHT)?
A Trust can be a way of avoiding your loved ones needing to pay Inheritance Tax (IHT) on your life insurance pay out, as a Trust keeps your life insurance separate from your overall estate. This means any money paid out from your life insurance policy won’t count towards the Inheritance Tax (IHT) threshold.
There can still be certain situations where Inheritance Tax (IHT) will need to be paid though. If you are worried about this happening, you should speak to a financial advisor for more guidance.
Who does my life insurance go to without a Trust?
Without a Trust, it can be unclear who is entitled to claim on your life insurance policy unless you have other arrangements in place (e.g. a Will). Usually, your close family members would be the ones to submit a life insurance claim (e.g. a spouse or partner, child or grandchild).
It would then be up to them to decide how much of the life insurance pay out goes to each person and what the money is used for, if this isn’t specified in a Will or other legal document. A Trust works as a cost effective alternative to a Will and allows you to make your wishes clear (and legally binding) for who gets the money, how much each person gets and even how the money is spent (e.g. to clear a remaining mortgage balance).
Who owns a life insurance policy in Trust?
When a life insurance is in Trust, you no longer legally own your life insurance policy (unless you are a trustee). The trustees legally own the policy which means they have control over any changes that need to be made to your trust or life insurance policy.
This is why it is wise to think carefully about who you choose as a trustee, as you may need to speak to them about changes that need to be made later (e.g. adding or removing a beneficiary if you can).
How much does it cost to put life insurance in Trust?
It’s usually free to put your life insurance policy into Trust and the process is pretty simple. You will just need to speak to your life insurance provider when you apply about setting up a Trust (or you can set this up at a later point).
You can also talk to a life insurance specialist, if you need extra advice about how Trusts work and which type of Trust will be right for you.
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How do I put my life insurance into a Trust?
It’s actually much simpler than you might think to write a new or existing life insurance policy into Trust. All you will need to do is:
- Have a life insurance policy (or buy a life insurance policy)
- Speak to your life insurance provider or advisor about creating a ‘Trust Deed’ for your life insurance policy
- Select your trustees (the people who will manage your policy) and the beneficiaries (the people who will receive the pay out from your policy)
- Fill in a life insurance Trust form with all of the relevant details you are asked for e.g. name, date of birth etc.
- Sign the form and get your trustees to sign it as well
- Send it off to your life insurance provider (they will get back in touch if there are any issues) and they will finalise all the arrangements
- Your life insurance policy is now in Trust!
If you need any help or advice about your life insurance Trust, you can speak to one of our skilled and friendly life insurance experts.