The benefit of placing a life policy into Trust is that it does not fall as part of your estate and the money is paid directly to the trustees. If the life insurance policy is not in Trust, it would be added to the deceased person’s estate and potentially cause an inheritance tax bill if the deceased nil rate band is fully used up.
For example, John is single and has a mortgage-free house worth £300,000 and a life insurance policy of £100,000 which is not in Trust. The value of his Estate is £400,000, minus his nil rate band of £325,000, means that £75,000 is potentially liable for Inheritance Tax (IHT). His beneficiaries would need to pay 40% tax on the £75,000 before they could inherit his estate.
As part of our advice and service, we do recommend that your policies go into Trust. The life insurers provide basic Trust forms which are free to use. If there is an existing policy, you need to request the relevant trust documents from your provider, and if you are setting up a new policy, this can be done at the time of application before the policy is put on risk.