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Mortgage Broker Q&A – Why is a life insurance policy written into trust?

Question; I have been advised that my life insurance policy should be written into a trust, why is this?

There are several reasons why certain life insurance or assurance policies should be written into trust and generally they are to do with avoiding tax liabilities and or ensuring that the proceeds of a policy will reach the intended recipient.

About two thirds of people in the UK don’t have a valid will and testament and die “intestate” which is the term for an estate which does not have a valid will in place to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).

In this case there are rules which govern how the estate is split which can often leave the proceeds of a life policy being paid out to someone who is not the intended recipient.

A good example is a couple who are unmarried and have arranged a life policy on the life of the main breadwinner to repay the mortgage in the event of death, in this case if there were no valid will in place the proceeds of the policy would likely be passed on to the deceased’s family rather than the surviving partner which could include children from a previous marriage or the deceased’s parents for example.

In another scenario a life policy which was written to pay out to a couple’s children on the last survivors death in order to cover inheritance tax liabilities would itself become part of the deceased’s estate, and therefore liable to inheritance tax itself if it were not written into trust.

The rules around taxation and particularly the taxation of trusts change regularly and this is one of the reasons why mortgage advisors will recommend a regular review of your circumstances. A policy once written into trust may well one day be better off outside of it and therefore it’s important to regularly check that existing provisions are still arranged in the most tax efficient and sensible manner possible.

If you have a life insurance policy which you think may need to be placed into trust or to speak further to a mortgage advisor call 0845 4594490 for independent advice.

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