When writing this blog, I discovered a fact about life insurance that I found unsettling.
In short, unless your policy is set up in the “right” way, it could be months – even years before your family get their hands on the cash for which you’d made provision.
What’s more, there’s a chance the lump sum (which you’d calculated was sufficient for your needs), could actually be subject to inheritance tax.
And right now that could mean £4 in every £10 could go to the taxman, which would significantly reduce the amount of your payout.
That’s not what I signed up for!
And I’m sure you didn’t either.
You want all that money to go to your loved ones.
You also want any payout to be available immediately.
That way your family won’t need to worry about the mortgage, rent and household bills. Your partner won’t need to worry if they take more time off work. And your children will have access to the cash needed to keep life as “normal” as possible.
Can you see why I felt a little unsettled?
Fortunately, there is a very easy way to protect your policy from these two “nasty” scenarios.
Let me explain…
The good news!
Interestingly, there’s a very easy way to ensure your life insurance policy not only pays out immediately, but is no longer subject to inheritance tax.
What’s more, this extra provision won’t cost you a penny.
That’s because all you need to do is set your life insurance policy “in trust” – something that any insurer should be able to do free of charge.
Let me explain exactly how this works with the help of an imaginary, but common scenario…
Meet Emily and Steve
Emily is 35. She’s married to Steve who’s 33. Together, they have two young children Sarah (5) and Tom (3).
Whilst Steve is the main breadwinner, Emily’s part-time work makes a significant contribution to the family’s income. What’s more, because Emily takes on most of the childcare responsibilities, as a couple they don’t need to rely on childcare, which means their childcare costs are minimal.
So whilst Steve’s income would comfortably cover the existing household expenditure, Emily and Steve are worried that should something happen to her, the financial impact on the family would hurt.
Firstly, the children would lose out on the treats and other extras that Emily’s salary currently covers. In addition, because Steve would need to rely on childcare to enable him to continue working – absorbing childcare costs into the family budget would have sizeable financial implications.
As a result, Emily and Steve decide to make some financial provision. After calculating the amount Emily contributes, they choose to take out life insurance for Emily so that in the event of her death, a lump sum of £100,000 would be available.
Emily’s payout will be delayed if she owns the plan
Emily wants to ensure that any payout is available to Steve and the kids immediately.
However, if she owns the plan, the payout becomes part of Emily’s estate.
And to get the best value from her policy, this is set-up is NOT desirable.
That’s because in this scenario, Emily’s estate could be liable for inheritance tax. In addition, payout of the £100,000 lump sum can only happen following probate or the receipt of a letter of administration.
In summary, if Emily has ownership of her policy, there are two important implications:
1. A liability for inheritance tax could reduce the value of the payout, significantly
2. Waiting for probate will mean Steve and the kids need to wait for the money they are due
Writing the policy in trust avoids these issues
The good news is there is a very simple solution to help Emily avoid both of these scenarios.
All Emily needs to do is write her life policy in trust – a measure that is totally free.
By putting her policy in trust, Emily can enjoy two big benefits.
Firstly, she can ensure that her policy pays out without delay. All Emily’s chosen beneficiaries need to do is produce the death certificate, follow their insurers procedures, and the payout can be made.
Secondly, because the policy pays out to her specified beneficiaries, the lump sum will not form part of Emily’s taxable estate. As a result, the £100,000 life cover would not be subject to inheritance tax.
A relatively simplistic look at a complex issue
Unsurprisingly, when it comes to wills, inheritance and other related matters, the subject can become very complex and confusing. As a result, it’s always worth seeking specialist advice to help ensure you make the right decision for you and your family. This post can’t cover all the intricacies of inheritance tax, but it can do the follow:
- Make you aware that any life insurance payout could be liable for inheritance tax
- Reveal that life cover may not payout immediately
- Raise awareness of the benefits of writing your policy in trust
If you’d like more information about trusts, please speak to an insurance advisor or your solicitor who will be able to advise you on the specifics to ensure you do what’s best for your family. Alternatively jot your questions in the comments below and we’ll do our best to help.
What do you think?
Were you aware you could put your life insurance in trust? Did you know that life insurance could be liable to inheritance tax? Has this post made you a little unsettled too?
Please let us know in the comments below.