Life Insurance & Critical Illness Policy in Trust

In 2010 it was estimated that only 5% of all new life insurance policies were placed in ‘trust’.

The only excuse for this is advisers are not doing a good enough job.

Placing a policy in trust is a free service offered by life insurance companies.

All it takes is one form which isn’t very difficult to fill in & ideally a covering letter.

The benefits of placing a life insurance policy in trust:

1/ In the event of a claim the money is paid straight to the beneficiaries without delay.

2/ The money does not form part of a deceased persons ‘estate’ which means it doesn’t go into ‘probate’ which on average can take 3 – 6 months to process before any beneficiaries receive what’s left.

3/ Because the money does not form part of a persons estate it does not have to be used to settle any outstanding liabilities so the beneficiaries get all of it.

4/ It does not get added to the value of the estate so it does not add to any inheritance tax liability which is why ‘whole of life’ cover set up in trust is ideal for paying Inheritance Tax bills.

Now wouldn’t you want to know your family will get all of your life insurance, instead of what’s left after the debts are paid, so they can decide what they want to do with it?

They might not want to clear the mortgage. They might want to sell the house and go on a cruise…

A trust form looks complicated because it is surrounded by legal jargon but the main points are:

1/ The policy owner is known as the ‘settlor’.

2/ The policy owner is also a ‘trustee’.

3/ At least one other ‘trustee’ needs to be added to the form.

4/ A ‘trustee’ is simply a person the ‘settlor’ trusts. They will be responsible for making sure the money from the policy is distributed according to the settlor’s wishes. A relative or close friend, who is likely to be around for a while, is a good choice.

5/ Beneficiaries can be named on the some forms and beneficiaries are the people who are going to ‘benefit’ from a claim.

6/ A witness needs to sign the form. This must be someone who is not named on the form anywhere else.

7/ Compose a ‘letter of wishes’ that says something like:

‘I (name) wish for the proceeds my life insurance policy (policy number) with (life insurance company) to be distributed according to my wishes as stated below:

50% to my wife (name & dob)

25% to my son/daughter (name & dob)

25% to the cats protection league.


Witnessed by:

This is a very basic option and lots of thought needs to go into this kind of letter.

But that is about it, in nutshell.

Policy in trust, job done.

Critical Illness policies can also be placed in trust but the policy holder ‘retains the benefit’ this means in the event of a claim the money doesn’t get sent to the beneficiaries but instead is retained by the policy holder.

Trusts are also usually ‘flexible’ so changes can be made.

Buying life insurance is like putting on a comfortable pair of shoes and placing the policy in trust is equivalent to tying up the laces.

That’s how important it is.