In the second instalment of our Insurance Series we take a closer look at life insurance. It can be an extraordinary gift to your loved ones at a particularly difficult time. But with so many available options on the market, it’s often difficult to know what is best for your circumstances. In this month’s article we consider life insurance in more detail and focus on how putting it into trust can be beneficial. Keep in mind that you can also get in touch with any one of our team of independent financial advisers for advice and assistance – we’re a click away on www.plutuswealth.com.
What is life insurance?
Life insurance provides financial cover for your dependents when you die. Its purpose is to make money available so that debts and expenses (such as mortgage payments and living costs) are covered after you pass, particularly if others rely on your income. It can take the form of a lump sum payment or can be paid in instalments.
There are a number of different types of life insurance cover:
- Whole-of-life cover. This will be paid out when you die, whenever that may be.
- Term or life term assurance. This offers a guarantee of payout if you die within a set period of time. This is usually set as the length of term on a mortgage or until young children are grown up and independent. In other words, when the need for and level of required monthly payments is much reduced.
- Increasing and decreasing term cover. These options allow you to amend the policy year on year to account for reducing mortgage payments or increases to living costs. Your premiums will go up or down accordingly.
- Renewable term cover. Such policies have an expiry date but can be renewed once that is reached if you want to continue with it.
- Joint life insurance cover. This is suitable for couples who want a single policy. The drawback is that it will only pay out once, unlike two individual policies.
For other types of insurance cover, such as critical illness or income protection, have a look at last month’s article for more details.
Why put it in trust?
Once you have decided which option is best for you, the next step is to consider how to set up the policy. One of the things we always recommend to clients is to consider putting their life insurance policy into trust. This is also known as ‘writing it in trust’.
A trust is a way to set aside something for a particular beneficiary. This could be a spouse or child/children, and can help to determine how and when it is paid out when you die. There are three key benefits to writing your insurance policy in trust:
- Avoiding the need to go through probate. This will make the process of payment much quicker as your policy will not need to go through probate in order for funds to be released. Probate takes even longer if there is no will in place. If your policy has been written in trust, then it does not form part of your assets that are considered during the probate process.
- Reducing your inheritance tax bill. As with probate, keeping your insurance policy in trust keeps it separate from the rest of your assets. This means that it is not counted as part of your estate when you pass. Anything that is, will be included with your other assets. If the total value of those assets exceeds the current threshold of £325,000 (excluding the residence nil rate band), anything above it will be taxed at 40%.
- You have more control over who the money will go to. With trusts you have to name the beneficiaries so you can be sure that the policy will pay out to whoever you specify. If your intended beneficiaries are minors, the trust can be looked after by a trustee until they turn 18.
Does it cost more?
No, it does not. There is no additional cost to writing your policy in trust, which is why it is surprising that so few people do it. Research shows that only 6% of policies are written in trust. If the option is not offered to you when taking out the policy, either ask for it or talk to an independent financial adviser. They can also help you to transfer an existing policy into trust.
Key considerations when thinking about life insurance
If you are considering taking out a life insurance policy, here are a few things to keep in mind to help you decide on the best option for you:
- Your age. The younger and healthier you are, the lower the monthly premiums.
- Your health. Any pre-existing health conditions will be taken into account, but so will your lifestyle choices. For example, if you are a smoker, even a social one, your insurance premiums will likely be higher than if you are not.
- The type of policy you want. Whole-of-life policies are guaranteed to pay out and are managed through investing in funds. This means that premiums can go up over time if a fund is not performing well, so that the insurer has enough in it to pay out when the time comes. If you are a couple, you may choose a joint policy, or you may prefer to hold individual ones. This can depend on how much you can afford to spend and the level of cover you are looking for.
- Your circumstances. You may be your family’s main breadwinner with young dependents and a mortgage, or you may be a single parent – the amount that you need to cover your debts and costs will differ. A general rule of thumb is to assume a level that is 10 times your annual salary or income. You can then refine that once you take your full finances into consideration.
Let us help
If you are considering some form of life insurance policy or want to know more about the benefits of writing one you have in trust, get in touch with us at Plutus Wealth. All you need to do is take the first step by giving us a call on 020 7871 5200 or dropping us a line at info@plutuswealth.com. Our team of independent financial advisers has the skills, knowledge and experience to help you get the best policy for your circumstances, at the right price for you.
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