Combined Life and Critical Illness Cover and the Use of Trusts
Last updated on September 25th, 2019 at 4:31 am
With a combined life policy with CIC, you need to use a special type of trust to ensure that the critical illness benefit is paid to the person who needs it. Read on to learn more about split benefit trusts. This information is particularly useful for takers of the CII R05, R06, AF1 and AF5 exams.
When critical illness is added to a life policy it’s usually as an alternative to the death pay out, not as well as; the sum assured is paid out on death of the policyholder or upon a diagnosis of a critical illness, whichever of those things happens first.
What to do about writing the policy under a trust?
The question then is: what to do about writing that policy under a trust? We’ve said before that pure life policies should always be written under trust. There is simply no reason why they shouldn’t, if protecting the family was the motivation for taking the policy out. But if you write a combined life policy with CIC under a standard discretionary trust wording, you’ve given the policy away; the policyholder is not a beneficiary, (for IHT reasons), which means that the critical illness benefit has been given away too.
To make sure this doesn’t happen, you need to use a special type of trust with combined life and CIC policies, often called a split trust or split benefit trust.Reading about Split Trusts in relation to combined life and CIC policies Click To Tweet
Split Trust or Split Benefit Trust
With this type of trust, if the death benefit pays out, then it is paid to the trustees who hold onto it for the beneficiaries. The sum assured does not form part of the estate for IHT purposes, and the money is available quickly without having to wait for probate. However, if the critical illness benefit is claimed, this is held absolutely for the policyholder rather than for the other discretionary beneficiaries.
On most life office trust forms, the policyholder is automatically a trustee. Others can then be appointed, as long as they are over the age of 18. Some offices recommend that at least two additional trustees are appointed, one of which they say should be totally independent – in other words someone who is not a beneficiary of the trust. It is imperative that at least one additional trustee is appointed at outset, as should the policyholder be the only trustee and they die, then the major advantage of being able to avoid probate is lost.
A trust is not needed of course if it’s a stand-alone CIC policy, but if it’s a combined life and CIC, then you can see just how important it is to use the right trust form to make sure that the critical illness benefit is paid to the person who needs it.
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Over to You…
What would happen if the policyholder died and they were the only trustee appointed?