Life insurance can provide valuable financial protection for your family after your death. However, simply having a policy is not the same as having an effective estate plan.
The way a life insurance policy is owned, who benefits from it and whether it is held in trust can affect how the proceeds are treated.
Why include life insurance in estate planning?
Life insurance can provide money to help dependants deal with financial commitments following a death.
For example, a payout might help with:
Mortgage or housing costs
Household expenses
Children's education
Funeral expenses
Other financial commitments
The policy can therefore form an important part of a family's financial planning.
Does life insurance form part of your estate?
The answer depends on the policy and how it is structured.
HMRC guidance explains that where the deceased is both the life assured and policyholder, the proceeds of the policy can form part of their estate for Inheritance Tax purposes. However, life policies can also be placed in trust. HMRC recognises that life policies held in trust have different considerations and that the trust documents need to be examined to determine the relevant beneficial interests.
What does putting life insurance in trust mean?
A trust is a legal arrangement under which assets are managed by trustees for beneficiaries.
A life insurance policy placed into an appropriate trust may allow the policy proceeds to be dealt with outside the deceased's free estate, depending on the circumstances and trust structure.
However, trusts can have complicated legal and tax consequences. Setting up a trust should therefore not be treated as a simple administrative exercise.
Should your will mention your life insurance?
Your will and life insurance policy should be considered together, but the will does not necessarily control the payment of policy proceeds.
You should check:
Who owns the policy
Who is insured
Who the beneficiaries are
Whether the policy is written in trust
Who the trustees are
Whether circumstances have changed
Review your policy regularly
Estate planning needs to change as life changes.
Marriage, divorce, new children, changes in financial circumstances and changes to your wider estate can all be reasons to review life insurance arrangements.
It is also important to keep policy documents somewhere your family or personal representatives can locate them.
Conclusion
Life insurance can be a useful part of estate planning, particularly where family members depend on your income or where your estate has significant liabilities.
However, ownership, beneficiary arrangements and trusts can affect the tax and legal position. Professional advice can help ensure that the policy works alongside your wider estate plan.
This article provides general information and should not be relied upon as individual legal or tax advice.