First, if the life insurance policy is not placed into trust – or ‘written in trust’ – your client’s beneficiaries are likely to have to pay inheritance tax on it, as proceeds fall outside your client’s estate on death. Second, providing supportive information about writing policies in trust complies with good practice around Consumer Duty requirements – it shows that you are looking for good outcomes for your client. Third, from a purely commercial point of view, having a conversation about placing a policy in trust can lead quite nicely to other potential sales and upselling opportunities.
Let’s consider what a trust actually is, and how it works for insurance policies.
A trust is a legal arrangement that allows the insurance policyholder to transfer their policy out of their estate and ‘gift’ it to a chosen beneficiary. They do this by creating a ‘trust deed’, which outlines who is involved in the trust as well as the terms of the trust. But take heed: policyholders must think carefully about who they choose to leave their policy to, since placing a policy in trust is normally considered an ‘irrevocable act’.
This means that clients can’t go back on their decision once it’s in place. So be aware that putting a policy in trust might not be the right thing for every client.
Protecting beneficiaries from inheritance tax
For clients who have written their life insurance in trust, the money paid out from their policy should not be considered part of their estate.
Therefore, it is not normally liable for inheritance tax. There are exceptions, however. For example, the beneficiary might be liable for an inheritance tax charge on the value of a property on each 10-year anniversary. The standard inheritance tax rate currently stands at 40 per cent. This is charged on the part of your estate above the £325,000 threshold.
Another benefit of placing a policy in trust is that there’s no need to wait for probate. Proceeds are paid out quickly, as long as there is at least one surviving trustee.
This can be particularly important in stressful times, when quick access to funds may be needed for immediate expenses or settling any debts.
Writing a policy in trust supports Consumer Duty
Informing your clients about the pros and cons of writing their insurance policy in trust aligns with ‘putting good outcomes for customers’ at the heart of your approach – a critical aspect of Consumer Duty.
Educating clients on writing a policy in trust is a simple step to add to a broker’s usual advisory process. It offers a well-planned route for ensuring that claim payments are made quickly, to the right people, and for their intended purpose.
An opportunity for new revenue streams
Conversations about trusts can naturally lead to discussions about other financial planning elements such as tax planning and will writing.
In fact, writing policies in trust can result in lower cancellation rates and fewer clawbacks, helping keep brokers’ income streams steady and reliable. And writing a policy in trust can be quite a simple process. Many providers offer online platforms where placing a policy in trust requires only a few additional steps in the overall application process.
In my role as CEO at Access Financial Services, I have witnessed a growing awareness of the benefits of writing policies in trust. More than 70 per cent of our policies are now written in trust. This is significantly higher than the industry average of around 30 to 40 per cent, but it’s arguably a goal that everyone should aim for.
Working this practice into your advisory process will not only enhance your offering, but may also deepen your relationship with your client. Above all, though, it should ensure that you are working hand-in-hand with Consumer Duty guidelines to safeguard your client’s financial future as well as those of their loved ones.
