In reading this article you will understand:

  • How Trusts can help mitigate financial hardship due to Probate delays.
  • The consequences of dying without a valid Will (Intestate).
  • How Beneficiary Nomination may prove to be a simple alternative to Trusts for some clients.

The internet is often the oracle most people consult when they are looking to buy something or do something they know little about. As a result, what they see online tends to frame their thinking, and putting life cover in trust is no exception.

Countless articles aimed at consumers put the need to place life cover in trust solely within the context of inheritance tax (IHT) mitigation. Protection advisers will know this is, of course, a big consideration – but it is not the only one.

The problem is, since consumers readily associate trusts with IHT mitigation, it may not occur to them that there are other reasons for putting life cover in trust. Raising awareness of this gives protection advisers a chance to demonstrate the value of the services they provide.

Timely and efficient

When Swiss Re published its “Life claims: balance of risk” report last year, its intention was to look at how effective the market is in ensuring the proceeds of life policies reach the intended beneficiary in good time. Using data from 2023 which shows that just 18.2% of all new term policies were written in trust, the report estimates at least 77.2% of new single life term policies – representing the vast majority – were not written in trust.

As the report makes clear, the move towards single life policies as opposed to joint life cover increases the risk of proceeds not reaching the intended recipient if no action is taken to direct them properly.

There is clearly a Consumer Duty angle to this, as the regulator wants consumers to have good outcomes resulting from their dealings with financial services and trusts can help to deliver this.

Not only do they take the proceeds of a life policy out of the insured’s estate, so there is no IHT liability on the payout, they also ensure the money goes to the chosen beneficiaries without having to go through probate.

“When I took out my life cover, I wanted my loved ones to get that payout as quickly as possible. So, I have written it into trust and named people to carry out my wishes – the trustees,” says Kim Jarvis, protection technical specialist at Royal London.

“When I die, the insurance company will deal with the trustees, meaning that any probate delays can be avoided. But if I didn’t put my life cover in trust, then on my death the insurance company would need to wait for probate to be granted before they could pay out the death benefit.”

Delays like this can cause financial hardship – which life policies are designed to alleviate – and stress for the intended beneficiaries. However, the strong association between trusts and IHT mitigation can mean people are often oblivious to the role trusts can play in other areas unless they take financial advice.

“Among clients there is a perception that trusts are only required to mitigate a potential IHT charge on death,” says Jarvis. “However, educating clients about the main benefit of trusts – providing peace of mind – can lead to better outcomes. Remember, with Consumer Duty there is a requirement to deliver good outcomes, and using a trust can deliver a better long-term outcome.”

Implications of intestacy

People who know they are not going to exceed their IHT allowances may wrongly assume trusts are only for wealthier people and overlook the role trusts have in speeding up life insurance payouts upon death by avoiding the need for probate.

“The speed of the process is a consideration for everyone,” says Barnsdale Financial Management principal adviser Scott Taylor-Barr, “If there is a will, probate can take around nine months but if there is no will, it can take even longer.”

Earlier this year, research from the Money and Pensions Service found that 56% of UK adults aged 18 and over do not have a will, including 53% of adults aged 50-64. Dying intestate can create complications for loved ones during a difficult and stressful time but people are often not aware of the full implications of this.

In the absence of a will or trust, a person’s assets are divided according to the rules of intestacy – which may not reflect their wishes.

“If I died intestate, my beneficiaries might not necessarily get the money,” says Jarvis. “Many people think that the spouse gets everything, but if there are surviving children, the spouse only gets a share with the rest being divided amongst the children.”

Jarvis also points out that cohabiting partners have no legal entitlement under intestacy rules, which makes writing a life policy in trust crucial for some couples who aren’t married.

“If they’ve not got a will or a joint life policy and they pass away, the money will go to the next of kin. That could mean it goes to their mum and dad, who might hate the partner,” adds Taylor-Barr. He is aware of a real-life situation where this has happened, so the surviving partner could not use the life policy payout to pay off their outstanding mortgage.

“Putting a life policy in trust allows you to choose where the money will end up,” says Taylor-Barr. However, he points out that there are potential drawbacks to trusts which mean they are not an automatic yes for every client who comes through the door.

“You have to get your head around what the client is trying to do and understand the bigger picture,” he says.

Considering the alternatives

One potential drawback highlighted by Taylor-Barr is that placing life cover in trust means clients give up a degree of control. “You, as the owner of that policy, choose to give away that policy – it legally belongs to the trustees.” Although the client will also be a trustee, decision making will be shared with the other trustees.

Taylor-Barr also points out there is a perception among some advisers that trusts are complex and time-consuming, which discourages them from trying to close the so-called ‘trust gap’. He sees beneficiary nomination as a simpler alternative that could help to narrow the trust gap.

Beneficiary nomination is a feature offered by some insurers as part of the application process for life cover. It enables clients to nominate their beneficiaries and, when they die, the insurer will pay those nominated beneficiaries without the need for probate.

“Beneficiary nomination will do the job for most people – but there might be certain situations where it is not robust enough, so there will always be a place for trusts,” says Taylor-Barr. “Advisers will also be led by what insurer they use. It could be the right policy for the client but the insurer might not offer beneficiary nomination so they would have to look at trusts.”

For more information on Beneficiary Nomination click of the link below for our insight from April of this year:

What are the benefits of Beneficiary Nomination?

Things to reflect on for CPD:

  • Why is dying intestate a major consideration for co-habitees if cover is written on a single life basis?
  • How familiar are you with the Beneficiary Nomination process offered by Royal London, Guardian and The Exeter?
  • What is the biggest barrier to Trust completion?