When you die, the proceeds from a life insurance policy will normally be paid into your estate free of tax. However, there could be inheritance tax to pay if your total assets exceed a certain limit. There may also be a delay because the insurer cannot hand over the money until legal matters concerning your estate have been resolved – i.e. probate has been granted. To avoid the possibility of having to pay inheritance tax on what the insurance policy pays out, and to make sure that your dependants get the money as quickly as possible, you can arrange for the policy to be ‘written in trust’ for the benefit of the person(s) you specify.
Most insurers give you the option of writing a policy in trust at no extra charge and have standard forms to cover common situations. Solicitors can also help with trust-writing (if your affairs are more complicated or if you insurer does not provide a trust-writing service) but they will charge a fee.
An alternative to writing a policy in trust is to buy a policy on a ‘life-of-another’ basis. Your husband, wife or partner takes out life insurance based on your life. If you die within the policy term, the policy pays out to him or her as owner of the policy. Note that you cannot take out a life-of-another policy on just anybody’s life: you must stand to lose financially if the person on who’s life you took out the policy were to die – in the jargon, you must have an ‘insurable interest’ in the other person. You are assumed to have an unlimited insurable interest in your own life and that of your spouse. When it comes to other people, your insurable interest is limited to the amount you would lose if they died.