Life Insurance & Trusts
If you're considering taking out a life insurance policy, your loved ones are more likely to benefit from it if it is 'written in trust'.
You may only be thinking about covering the mortgage and other debts you don't want your family to have to pay in the event of your death, but a life insurance in trust can also ensure that they get more of your money — instead of it going to the taxman as part of your inheritance tax bill.
Is life insurance taxed?
Life insurance isn't usually subject to any tax, but depending on how much your 'estate' is valued upon your death, that life insurance pay out could be subjected to a large inheritance tax bill instead of it being received in full by your loved ones.
Your estate is the value of everything you own, including legal rights, interests and entitlements to any assets. And if you're single or divorced, the threshold for having your estate subject to inheritance tax is £325,000.
This amount and below is free to be passed on to your beneficiaries (the family, friends and anyone else who you will inherit something from your estate) without tax. Any amount above this limit will be subjected to a 40% tax. So for example, when you die, if your estate was valued at £600,000, your inheritance tax bill would be £108,000, which is 40% of the £175,000 above the £325,000.
This means money would have to come out of your estate to pay the tax bill or your beneficiaries would need to pay it in order to receive what you have left for them.
Putting life insurance in trust
If your estate is valued higher than the tax inheritance threshold, your life insurance pay out will form part of your estate and thus be subjected to the 40% inheritance tax.
This can be a headache for the family you leave behind. They might end up having to use the remainder of your life insurance pay out to pay off some inheritance tax bill, rather than the mortgage, or any other debts that it was intended to pay off in the first place.
Writing your life insurance in trust means that even if your estate is subject to inheritance tax, you can leave behind some money that is just for your loved ones, or even to pay off your entire inheritance tax bill.
Surprisingly, the vast majority of life insurance policyholders don't have theirs put in trust, despite the obvious benefits. It may not always be for everyone, and may not apply to those whose estate is valued below £325,000. But most the time it's a decent piece of forward planning that could save your loved ones thousands of pounds.
We can help if you need any guidance on this topic.
Director and Protection Adviser.
Phone 01524 920015 Mobile 07951113654