It’s a question many people ask when thinking about protecting their family. Putting life insurance in trust can be a simple but effective way to make sure your loved ones are supported financially when they need it most.
Your life insurance policy is often one of your most valuable assets. By placing it in trust, you can have more control over who receives the money, how quickly it’s paid, and how much tax is due. Let’s take a closer look at what this means and whether it could be right for you.
What does it mean to put life insurance in trust?
Life insurance pays out a lump sum if you pass away during the term of your policy. Normally, that money would form part of your estate.
A trust is a legal arrangement that allows the policy to be held separately from your estate. You appoint one or more trustees, often family members, friends, or a solicitor, to look after the policy. They are responsible for making sure the money goes to the people you’ve chosen, known as the beneficiaries.
One of the biggest benefits of a trust is that the money can usually be paid out more quickly and with less paperwork, as it doesn’t usually need to go through probate. This can be especially helpful if you’re not married or in a civil partnership. It can also help keep the payout out of the hands of the taxman, meaning more of the money goes to your loved ones.
How does it work?
There are two main types of trust.
· A bare trust means the trustees hold the money for the beneficiaries you name, who receive it outright when they reach 18 (or 16 in Scotland).
· A discretionary trust gives the trustees more flexibility. They can decide how much each beneficiary receives, when they receive it, and under what conditions.
There are also other options, such as gift trusts or split trusts, which may be suitable if your family situation or policy type is more complex. Once the trust is set up, the trustees legally own the policy. They must keep the trust deed safe, as they will need it to make a claim on the policy when the time comes.
It’s important to remember that you, as the policyholder, remain responsible for paying the premiums. Many people use a solicitor or financial adviser to ensure the trust wording is clear and accurate.
Setting up a trust
Putting a life insurance policy into trust is usually straightforward. Many insurers offer this as an option when you first take out a policy, often at no extra cost. You can also put an existing policy into trust later on, though this may involve some advice from a financial adviser or solicitor and could incur a small fee. The right timing and approach will depend on your circumstances.
Things to consider
While trusts have clear benefits, there are some downsides. The decision is usually irreversible, so once a policy is in trust, you can’t take it back. You also give up some control, as decisions about the policy must be agreed by the trustees rather than just yourself. Choosing trustees you trust is therefore very important.
If your policy isn’t in trust, the payout forms part of your estate and is distributed under your will. This usually means it will go through probate, which can take weeks or even months. There may also be inheritance tax to consider. In the 2025–26 tax year, everyone has a £325,000 inheritance tax allowance, with an additional £175,000 allowance if you leave your home to a direct descendant. Anything above these thresholds is typically taxed at 40%, which could reduce what your family receives.
Is putting life insurance in trust right for you?
Every family is different. A trust can offer speed, clarity, and peace of mind, but it’s not the right answer for everyone. Speaking to a financial adviser can help you understand your options and make a decision that fits your goals, your family, and your wider financial plan.
We’re here to help answer any questions and guide you through the process, making it as simple and stress-free as possible.
