Life insurance ensures that your loved ones will receive a cash payment upon your death. But what if you want to control how they spend that money? A trust could be the answer.
Why life insurance is important
Life insurance is an extremely important element of financial and estate planning. It is a tool that can be used to ensure the financial security of your family if you die. Upon your death they will receive a payout which is ringfenced outside your estate. That means firstly that funds can be accessed quickly, without waiting for probate, and secondly that this sum is not liable to inheritance tax.
When you take out a life insurance policy you must specify who the beneficiary or beneficiaries are. Most life insurance payouts are made with no strings attached so your beneficiaries can choose to use the money as they wish. Often it is used to pay funeral expenses, pay off debts such as a mortgage, cover ongoing bills and provide funds for your child’s education. It relieves the financial burden on your loved ones when you are no longer around to provide for them.
Can you control how and when life insurance is accessed?
In certain cases, you might want to limit how and when the beneficiaries have access to the money and this is when a trust can come in useful.
Imagine for example, you have a teenager who is profligate with money and has yet to learn the basic skills of budgeting and saving. If that child were to receive a life insurance payment in the thousands, the likelihood is that they would spend it foolishly. Fast forward a decade however, to when that teenager has grown up and now understands the realities of earning their own money, living on a budget and saving up for big ticket items like a car, education or home. Now they are likely to use the money far more wisely on purchases which will have a much greater long-term benefit.
Putting a trust in place will enable you to pass certain assets to a beneficiary with instructions for how and when they can be accessed. A named trustee, often the executor of your will, will manage the trust until such time as the beneficiary gains access to it.
Reasons to use a life insurance trust
Here are some case studies featuring Infinity clients (names have been changed) who have set up life insurance trusts for different reasons:
1. To give family a steady stream of income
Anna does not want all her death benefit to be paid out all at once because she thinks it will be too large a sum for her partner to manage. She has put it in a trust so that it can be paid out in instalments thereby giving her partner a secure income stream over a number of years.
2. To leave money for young children
Gordon is a single parent with two children who are minors and cannot therefore be named beneficiaries on a life insurance policy. He created a trust with his sibling as the trustee. If he dies, they will be able to use the money to cover the children’s day-to-day needs while they are minors. Any leftover funds will be paid out to them when they reach majority.
3. Reserve funds for a specific purpose
Guy has teenage children and wants to ensure that if he passes away, they can only use the funds they receive from life insurance to further their education or to buy a family home. A trust enables him to set these specific rules about the use of the life insurance payout.
You may plan on being around to support your family for many years to come but sometimes life has other ideas. Preparing for every eventuality – even the most unpalatable ones – is what financial planning is all about. If you don’t have any life insurance in place, it’s time to rectify that. Contact us for a free consultation with an experienced adviser about your personal life insurance requirements.
For specific information about trusts, you can contact our trust services team here.
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