There are clear benefits to writing life policies in trust. Clients can specify who they want to receive the payout, which is particularly useful for cohabiting couples who do not have the same legal rights as married couples.
Payouts will fall outside a client’s estate for inheritance tax purposes if a policy is written in trust. Beneficiaries will also receive payment quickly without having to go through probate – the legal process for dealing with a deceased person’s estate which is increasingly subject to delays.
However, most people do not place their life policy in trust. According to Swiss Re’s recent Life Claims: balance of risk report, just 18.2% of new policies in 2023 were written in trust. Growth in the uptake of trusts also appears to be slowing – Swiss Re’s statistics show the proportion of all new term policies placed in trust increased by only 1.6% in 2023, down from 4 per cent in 2022.
The problem is that trusts are often perceived as too complicated – even among advisers – or only for wealthy people with IHT planning needs. So, should more insurers offer beneficiary nomination – where named beneficiaries are paid directly by the insurer – as a simpler way of getting payouts to the right people quickly, with no IHT implications?
Putting it off
Helping clients to understand why their life policy should be placed in trust is one thing – but advisers often find it difficult to get clients to act upon this knowledge.
“The problem we’ve had over the years is saying to clients this should be written in trust, have a form,” says Highclere Financial Services partner Alan Lakey. “Then we say you need to have a trustee – someone you trust who is no older than you – who do you think that should be?”
Lakey points out that if the client’s chosen trustee is happy to do it, the client needs to fill out the application form and sign it – along with the trustee – in the presence of an independent witness. Everything needs to be present and correct – if it isn’t it can be sent back which causes delays.
But most clients lose interest before then – Lakey says that despite sending lots of clients off with forms, only a few come back completed. It can even take several years before a client gets around to filling it in. “They can’t be bothered to do it,” says Lakey.
In contrast, beneficiary nomination is a quick and easy to do when clients are applying for life cover.
“Beneficiary nomination is simple – all you have to say is in the event of my death I want the money to go to my daughter, or a 50-50 split between two people,” says Lakey.
Limitations
Not all insurers offer beneficiary nomination, so choice is limited compared with writing a life policy in trust. Royal London is one of several insurers who do offer beneficiary nomination and Jennifer Gilchrist, proposition Specialist for the firm’s protection business, says its appeal lies in its simplicity.
But while beneficiary nomination is great for people whose circumstances are straightforward, Gilchrist suggests those with more complex needs are likely to be better served by trusts.
One example of that is where a beneficiary does not have the mental capacity to make their own financial decisions, a trust can be set up to allow trustees to make those decisions on their behalf.
“If beneficiary nomination isn’t an option for you usually a trust is good as payouts will not have to go through probate, you will get the money to pass to who you want it to and it will speed up the claim,” says Gilchrist. “Speed is key to claims, especially when you see that they are taking a bit of time [to be paid by insurers].”
There are other reasons why beneficiary nomination might not work for a client. Perhaps the most obvious is that although it takes the life policy payout of the client’s estate for inheritance tax purposes, it does not allow for more comprehensive IHT planning the way that trusts do.
Another limitation is that beneficiaries can only be nominated at the point a client makes their application for cover with the insurer. However, changes can be made where named beneficiaries die or if the client and their spouse divorce, for example.
Automation
Ultimately, whether advisers steer their protection clients towards trusts or beneficiary nomination, if offered by the insurer, will depend on their needs. Gilchrist is clear that just because beneficiary nomination is quick and easy to do when someone applies for cover, advisers should not give trusts the cold shoulder – especially as technology is being used to simplify parts of the application process.
“Over the last few years the industry has been good at trying to automate and digitise trusts to reduce the pain of the application forms and enable people to pick up specimen trust forms online,” she says.
“For trust and beneficiary nomination, we are looking at what we can do for existing customers, so people can benefit from new thinking about having something in place to make it easier to leave money to beneficiaries.”
