Trusts. What are they, and why use them for insurance?

It's often said that less than 10% of life insurance policies are written in trust. Although not all policies are suitable for writing in trust, this still leaves a large number of policyholders who haven't taken advantage of this simple option. In this post, I'll explain what a trust is, the benefit of putting one in place, and question why more policies aren't in trust.

What exactly is a trust?

A trust is a relationship recognised by law whereby something is held by one party for the benefit of another. In respect of life insurance, there are normally three parties involved: the settlor (the policyholder); the trustee/s (the person/s to whom the insurance company will pay a claim); and the beneficiary/ies (the ultimate recipient of the money as intended by the policyholder). This may sound complex, in fact they are anything but: they simply allow someone to pass property on to another person at some point in the future.

Why write life insurance in trust?

There are several reasons to write life insurance in trust.

1. Avoid probate delays. Probate is the legal process which must be completed before your estate can be distributed. This can take anything from a couple of months up to a year, and beyond in some cases. Probate delays can present a problem if an insurer has paid money into your estate and your family requires it sooner rather than later.
2. Reduce an inheritance tax (IHT) bill. Benefit payed from a life insurance policy written in trust can be paid outside of your estate for IHT purposes.
3. A trust enables you to choose your beneficiaries, thereby remaining in control of your assets.
4. Being a simple process (often no more than a one page form), it is normally free of charge set up a trust.

So, why don't more people have one?

Most people I speak to who haven't written their life policy in trust simply weren't aware of trusts and their benefits. With people buying policies over the internet or from direct insurers on a non-advised basis, it may be some time before people are fully aware of their benefits.

Check your existing policies.

If you have a life insurance policy, and are not sure whether it is written in trust or not, it is worth checking. You can do this by asking your insurer or speak to a financial adviser.