The Importance of Writing Individually Owned Life Policies Under Trust
In this article, we discuss replacing death in service benefits with an individually owned life assurance policy and the importance of writing that policy under a trust – useful for CII AF1, AF5, and R05 revision.
With daily news reports of some of the biggest companies planning to cut jobs as a result of the coronavirus pandemic, many employees will be leaving the comfort of what it means to work for a large organisation. Not only is it the loss of a job that they will need to contend with, but often the loss of various employee benefits such as a workplace pension scheme, company PHI and death in service benefits.
Let’s consider replacing death in service benefits with an individually owned life assurance policy and the importance of writing that policy under a trust. All the employee benefits that might have been taken for granted may now need replacing particularly if the employee is going to change track and start their own new business.
There are very good reasons for writing life policies under trust, but it might be particularly important where a couple is not married but have children together or do not have a will.
Writing a life policy under a trust does mean that the sum assured will not form part of the estate for IHT purposes. That might be one driver for some people, but one of the main reasons for writing life policies under trust is the probate process.One of the main reasons for writing life policies under trust is the probate process. Click To Tweet
If there is no trust, and the life assured dies, the life office will not pay out the death benefit until the executors or administrators produce a grant of probate or letters of administration. If the estate is relatively simple, then this process might take a few months. If it’s more complicated, then it could take a year or more.
However, if the life policy is written under a trust, then the life office doesn’t need a grant of probate, because the legal owners of that policy are now the trustees, and they should receive payment of the sum assured within 10/14 days.
When a death occurs, the surviving partner or children will have enough on their plate without having to worry about potential financial difficulties too. If the deceased’s income was required to meet mortgage repayments and other bills or debts, a delay of months, due to probate, could have severe repercussions.
If IHT is an issue, then using a trust would generally avoid or save 40% inheritance tax on that sum assured value too.
So, let’s get back to basics; there is generally no good reason why individually owned life cover designed to protect a family should not be written under a suitable trust.
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