Most life insurance companies in the UK offer a free services for placing your life cover into trust. This article explains the different types of trust available for your life insurance and why you should seriously consider placing your policy in trust.
What is a trust?
Trust allow you to make a gift to a beneficiary while maintaining some control over who benefits from it and when it becomes available. Instead of the gift being passed directly to the intended beneficiaries, it is transferred to and held by people known as trustees. The gift can be anything from a house to a life insurance policy. Through this article we will only consider life insurance policies or combined life and critical illness policies.
What is required to form a trust?
There are four key parts to a trust: –
- Settler – Customer or owner of the life insurance policy.
- Trust Form – The legal document which formulates the trust.
- Trustees – Key individuals appointed to by the settler as trustworthy to ensure the settlers wishes are acted upon.
- Beneficiaries – The individual (s) who will benefit from any proceeded.
A trust form may also require a witness to counter sign each of the sections.
Types of trust?
There are two types of trust when used for the purpose of life cover. These are Base or Absolute Trust and Discretionary Trust.
Base or Absolute Trust
An absolute trust is where the settler knows from the outset who the beneficiary will be, and that the beneficiary will NOT change. This type of trust is rarely used these days due to the flexibility offered by the discretionary trust however one good use of the trust would be where a life insurance policy is taken out to protect the interests of children from a previous marriage. As the children are known and will not change in the future the absolute trust trust would be ideally used here.
A discretionary trust is where the settler puts control of the beneficies to the trustees. The trustees will decide who will benefit from a wide range of potential beneficaries including the family, they will decide at what time and in what share each beneficiary will receive. To help the trustees the settler can give them a written guidance on their latest wishes. This type of trust is extremely flexible and provides a degree of control over the beneficiaries.
Split Discretionary Trust
Where a life insurance policy includes terminal illness benefit and critical illness cover a split discretionary trust can be used, this provides the added benefit of paying out the lump sum to the settler if it suffers a critical illness or diagnosed with terminal illness, but if they suffer loss of life the discretionary trust would apply.