Simplifying and streamlining life insurance payouts

Making a will is an important aspect of estate planning, but another equally crucial aspect is the management of any life insurance policies. These can provide financial security for loved ones in the event of a person’s death, and a 40-year policy with a £250,000 final pay-out can cost as little as getting a daily newspaper delivered (Premium based on a 31 year old male, non-smoker and in good health).

However, it’s critically important to ensure that the policy forms part of a trust, rather than simply being added into a deceased person’s overall estate. By conducting a simple process known as “writing into trust”, the life insurance policy becomes part of a trust that will be paid directly to beneficiaries upon death. This means any payouts are passed onto the intended recipients far more quickly and tax-efficiently than they otherwise would be, as explained in more detail in the next section.

With many years of expertise in writing life insurance policies into trust, the Select Investment Managers team are able to explain the benefits of this tax-efficient process in concise layman’s terms. We appreciate that a little advanced planning can simplify a deeply upsetting time, as well as helping to avoid the lengthy process of probate, which is also outlined below.


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Lowering tax liabilities on a deceased estate

The overall value of a deceased person’s estate is based on all their assets. These include cash and investments, ownership of material goods like houses and cars, plus payouts from life insurance policies. The £250,000 policy mentioned above would comprise much of the £325,000 assets that can be left by a single person without any tax being due.

Estates valued at more than £325,000 (or £650,000 for a married couple) will have any excess value taxed at 40 per cent, which can have a significant impact on the sums descendants finally receive. It can be painful for loved ones to supply HMRC with paperwork confirming the value of a dead person’s estate, and potentially even more upsetting to see a chunk of that person’s legacy being handed over to the Government – particularly considering the amount of tax that will already have been paid during their lifetime. The process of calculating an estate’s value and confirming an executor’s authority to distribute funds is known as probate, and it can take years before probate is granted. Only at this point can a person’s assets be passed on according to the stipulations in their will, and the process can become even more protracted if a person dies without having prepared a will.

Writing life insurance into trust is an obvious way to ensure the life policy payout isn't calculated as part of the estate value that may be subject to inheritance tax. The policyholder creates a trust, before nominating a trustee to manage it and ensure that any beneficiaries receive their due entitlement. The trustee can also be a beneficiary, and there are no limits on how many (or few) beneficiaries have to be named. A Select Investment Managers adviser can help with each stage of this process, tailoring recommendations and guidance to match each person’s unique circumstances.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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