What is a Trust and Should I Put My Protection Insurance Policy in One?
When you take out protection insurance, such as life cover, critical illness cover, or income protection, it’s important that your money goes to the right people when they need it most.
One way to help make this happen is by putting your insurance policy into a trust.
But what exactly is a trust, and should you consider using one for your protection insurance?
This guide explains the basics in plain English and helps you understand if a trust might be right for you.
What is a Trust?
A trust is a legal arrangement where you, the policy owner, place your insurance policy in the hands of one or more people called trustees.
These trustees hold and manage the policy and pay out any money on your behalf to the people you want to benefit, known as beneficiaries.
When you put a protection insurance policy into a trust, the policy technically no longer belongs to you but to the trust.
This means the payout from your insurance policy skips your estate and goes straight to your beneficiaries.
Why Use a Trust for Your Protection Insurance?
Protection insurance, such as life insurance, critical illness cover, or income protection, is designed to help you and your loved ones manage financial risks.
But without a trust in place, there can be some problems.
Delays in receiving money
If your insurance policy isn’t in a trust, the payout will usually form part of your estate after you die.
Your estate must go through probate, which is a legal process that can take several months. This may delay the money reaching your family when they need it.
Inheritance tax complications
Money that goes through your estate may increase the value of your estate, potentially affecting inheritance tax calculations.
Risk of disputes
Without clear instructions on who should get the insurance money, family disagreements can arise.
Putting your protection insurance policy into a trust can help avoid these issues by:
Ensuring quicker payment to your chosen beneficiaries.
Reducing the chance of your payout being caught up in legal processes.
Giving you control over who benefits and when.
Real-Life Example: The Smith Family
Jane Smith is 38 and has a life insurance policy worth £250,000.
She wants to make sure her husband and two young children will receive money quickly if she dies.
Without a trust, the insurance money would be paid into Jane’s estate and could get tied up in probate for several months.
This delay could cause financial difficulties for her family, especially as her husband relies on her income to cover bills and childcare.
Jane decides to put her policy in a trust.
Now, if something happens to Jane, the trustee, her husband, will receive the money directly, usually within days or weeks.
This provides immediate financial support for her family without waiting for probate.
What Protection Policies Can Be Put in a Trust?
Most protection insurance policies can be placed in a trust, including:
Life insurance.
Critical illness cover.
Income protection insurance.
However, the exact rules and benefits may vary depending on the insurer and policy type.
Some policies might automatically include a trust or give you the option when you apply.
How Does Putting a Policy in a Trust Work?
1. Choose your trustees
These are the people who will hold the policy and manage the distribution of funds.
Trustees are often family members or trusted friends.
2. Decide your beneficiaries
These are the people you want to benefit from your insurance payout.
This could be a partner, children, other family members, or even a charity.
3. Set the terms of the trust
This includes who gets what and when.
For example, you might specify that your children receive the money when they turn 18, or that your partner receives income to cover mortgage payments.
4. Complete the trust deed paperwork
Your insurer will provide forms to officially place the policy in trust.
Once the trust is set up, your insurance company will know to pay the trustees directly if a claim is made.
Things to Consider Before Setting Up a Trust
You Keep Control, But the Policy Doesn’t Belong to You Anymore
When your policy is in a trust, you still pay the premiums and can normally change the policy details.
However, you no longer own the policy. The trustees do.
This can affect your flexibility to assign or change the policy without the trustees’ involvement.
Trustees Have Legal Responsibilities
Trustees must manage and distribute money responsibly, in line with the trust deed.
It’s important to choose trustees who are trustworthy and capable of handling this responsibility.
You Don’t Need a Trust for Every Situation
If your estate is small, or you trust your will and estate plans to handle everything, a trust may not be necessary.
Also, some policies may already be set up to pay directly to beneficiaries.
Tax and Legal Advice Is Important
While trusts can help with tax planning, there can be tax implications.
It’s important to speak to a financial adviser or solicitor before setting up a trust to make sure it’s right for your personal situation.
When Might You Not Need a Trust?
You may not need a trust if your sums insured are small and your estate is simple.
You may also not need one if your protection policy is part of a group scheme with benefits that pay out automatically to nominated partners.
A trust may also be less necessary if you have a clear will that directs insurance payouts effectively and your insurer pays the beneficiaries directly.
In Summary: Should You Put Your Protection Policy in a Trust?
A trust can be a very useful way to ensure your protection insurance payout gets to the right people quickly and securely.
It can help avoid probate delays, reduce family disputes, and offer peace of mind knowing that your loved ones will have the financial support they need at a difficult time.
However, a trust is not necessary for everyone.
It depends on your family situation, the size of your estate, and your personal wishes.
We recommend considering a trust as part of your wider financial and estate planning, and speaking with a professional to get advice tailored to your needs.
How BSL Assured Can Help
If you’re thinking about putting your protection insurance policy in a trust or want to learn more about your options, BSL Assured is here to guide you.
We specialise in clear, jargon-free advice on protection insurance and trusts, helping you protect what matters most.
Get in touch with BSL Assured today to discuss your protection insurance needs and whether a trust might be a good choice for you.